On August 10, 2018, the Governor of Massachusetts signed “An Act relative to the judicial enforcement of noncompetition agreements,” otherwise known as The Massachusetts Noncompetition Agreement Act, §24L of Chapter 149 of the Massachusetts General Laws. (That bill was part of a large budget bill, H. 4868, available here; the text of the provisions relevant here at pages 56-62 of the bill as linked). The Act limited non-competition provisions in most employment contexts to one-year and required employers wishing to enforce such a one-year period to pay their ex-employees for the time that such employees are sidelined. The Act also precluded enforcing such provisions against employees laid-off or terminated without cause or against employees classified as non-exempt under the Fair Labor Standards Act. These and the other requirements noted below become effective and apply to employee noncompetition agreements entered into on or after October 1, 2018, and the Act curiously contains some significant exceptions as well. Below we will highlight material aspects of the new law, which was recently featured on Employment Law This Week.

Requirements for Enforcement Start Early

In connection with a non-compete agreement provided to an employee at the start of employment, an employer must provide it to the employee at the time of the offer of employment or ten business days prior to starting employment, whichever is earlier. Act, lines 1282-1291, at page 58-59. (The Act defines such agreements as “an agreement between an employer and employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.” Act, lines 1264-1267, at page 57-58)

For a non-competition agreement presented to an employee during employment, the employer must provide it to the employee ten business days before it takes effect and such an agreement must be supported by “fair and reasonable consideration independent from the continuation of employment.” Act, lines 1287-1297, at page 58-59.

The Act also requires that a non-competition agreement “expressly state that the employee has the right to consult with counsel prior to signing.” Act, lines 1289, at page 59.

Further, the Act applies to all employees and independent contractors working in Massachusetts regardless of whether the agreement has a choice-of-law provision specifying the law of some other jurisdiction applies. Act, lines 1249-51, at page 57. (How it will apply to sales personnel with multi-jurisdiction territories remains to be seen, and its provision purporting to apply its requirements to those who are a “resident of” Massachusetts as opposed to those working there certainly appears one likely to be litigated as well. Act, lines 1346-1349, at page 61.)

The Death of Reasonable Pro-Employer Restrictions In Massachusetts?

The Act certainly requires employers to pay attention. But it preserves many tools for employers to use with employees, so it seems that reports of the death of such restrictions is greatly exaggerated. When employers understand a core of four concepts about the new law, they will be able to structure their approach accordingly.

First and foremost, the Act requires that most non-compete periods be limited to one-year during which the employee receives garden-leave pay or some “other mutually agreed-upon consideration.” Act, lines 1318-1330, at page 60. The Act defines garden-leave pay as payment of at least half of the employee’s highest base salary during the two years preceding the restricted period but it does not define in any way the phrase “other mutually agreed-upon consideration.” Id. The Act also allows the one-year period to be extended to two years and the obligation to pay compensation to vanish where the employee has breached fiduciary duties or has taken property belonging to the employer. Act, lines 1305-1313, at page 59-60. In the end, the Act states that such provisions “must be no broader than necessary to protect one or more . . . legitimate business interests of the employer” but also that “[a] noncompetition agreement may be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative restrictive covenant, including but not limited to a non-solicitation agreement or a non-disclosure or confidentiality agreement.” Act, lines 1298-1304, at page 59.   But the Act also notes that courts may “reform or otherwise revise” such agreements to be consistent with the Act and Massachusetts public policy. Act, lines 1331, at page 60 and Act, lines 1343-1345, at page 61.

Second, the Act precludes enforcement of non-competition agreements against certain classes of employees. An employer may not enforce non-competes against employees who are (i) nonexempt under the Fair Labor Standards Act, (ii) undergraduate or graduate students who are in an internship program or other short-term employment relationship with an employer (whether paid or unpaid) while enrolled in a full-time or part-time undergraduate or graduate educational institution, (iii) under age 18, or (iv) terminated without cause, though “cause” and “without cause” are undefined. Act, lines 1332-1342, at page 61. Still, the Act expressly states that a number of traditional restrictions fall outside its requirements, and may continue to be used by Massachusetts’ employers, including the following as agreements unaffected by the Act:

  • those “not to solicit or hire employees of the employer”
  • those “not to solicit or transact business with customers, clients, or vendors of the employer”
  • those “made in connection with the sale of a business entity or substantially all of the operating assets of a business entity or partnership, or otherwise disposing of the ownership interest of a business entity or partnership, or division or subsidiary thereof, 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”
  • those “outside of an employment relationship”
  • “forfeiture agreements,” which are defined 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 engages in competitive activities following cessation of the employment”
  • nondisclosure or confidentiality agreements
  • invention assignment agreements.

[Act, lines 1268-1281, at page 58.]

Perhaps of greatest interest, employers may still extract longer non-competes “made in connection with the cessation of or separation from employment if the employee is expressly given seven business days to rescind,” which means that noncompetition agreement may be part of a severance agreement. Id. How that will play out where one enters into a severance agreement with one who would otherwise be terminated without cause will prove interesting.

Third, the Act also limits both geographic scope and precludable competitive activities. It does so by limiting scope to those geographic areas employee actually worked in and those services the employee actually provided—during employee’s last two years of employment. This is seen in the statutory language that says “[a] geographic reach that is limited to only the geographic areas in which the employee, during any time within the last two years of employment, provided services or had a material presence or influence is presumptively reasonable” and that “[a] restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last two years of employment is presumptively reasonable.” Act, lines 1310-1317, at page 60.

Fourth, the Act also seems to limit venue to certain specific courts. The Act states that “[a]ll civil actions relating to employee noncompetition agreements subject to this section shall be brought in the county where the employee resides or, if mutually agreed upon by the employer and employee, in Suffolk county; provided that, in any such action brought in Suffolk county, the superior court or the business litigation session of the superior court shall have exclusive jurisdiction.” Act, lines 1350-1354, at page 60-61. The notion of “exclusive jurisdiction” will also likely be the subject of contested claims brought in federal court under the Act.

All Things Considered, I’d Rather Be In ….

As noted at the outset, the Massachusetts Act is a set of significant, material changes for employers. But they are manageable when one understands the full panoply of options that remain open to employers in Massachusetts and takes the time to plan with counsel for the October 1st transition to a new non-compete regime that in fact will continue to include much of what is already in use for sophisticated employers. So, Massachusetts will remain manageable.

Featured on Employment Law This Week: NJ Senate Advances Ban on Sex Harassment Confidentiality Agreements.

The New Jersey Senate wants no more secrecy around harassment claims. On a 34-to-1 vote, the chamber approved legislation banning

involving sexual harassment claims. The bill is still pending in the House, where a vote is expected in the next few weeks. The legislation would also allow victims to keep their identities confidential and would establish jurisdiction in Superior Court, arguably bypassing arbitration agreements.

Watch the segment below.

Following the FBI’s recent raid of the office and home of Michael Cohen the bounds of the attorney-client privilege have become a topic of debate and discussion. During the raid, the FBI seized business records, documents, recordings, and emails. Earlier this week, Judge Kimba Wood for the Southern District of New York ruled that the U.S. Attorney’s Office for the Southern District of New York could review the documents seized with a special team in place to review for privilege despite Mr. Cohen’s objections to this process.

Thus, the question has quickly become when is the attorney-client privilege actually applicable? Simply put, just telling a lawyer something, or copying a lawyer on an email, does not make the conversation or email privileged. Not all communications with an attorney are privileged from disclosure under the attorney-client privilege. The reality is that a communication (i.e. emails, correspondence, oral communications, etc.) will only be privileged when the subject communication meets certain criteria, and it is confidential (meaning that it is not shared with non-attorney/non-client third parties).

In order for the privilege to apply to the communication itself, the “primary purpose” of the communication must be to seek or provide legal advice. In other words, a communication is not privileged if it does not: (1) request legal advice or (2) convey information reasonably related to a request for legal assistance. Thus, asking an attorney about investment advice or other non-legal issues is NOT privileged. Moreover, having a discussion (or email exchange) with an attorney, where others are present (or included) is NOT privileged.

Since in-house counsel often act as part of an executive team, they may be providing more than just legal advice. Thus, general “[b]usiness advice, unrelated to legal advice, is not protected by the privilege even though conveyed by an attorney to the client,” because the purpose and intent is not to communicate legal advice. See In re Vioxx Prds. Liab. Litig., 501 F. Supp. 2d 789, 797 (E.D. La. 2007) (emphasis added) (quoting In re CFS-Related Securities Fraud Litig., 223 F.R.D. 631 (N.D. Okla. 2004)).

Emails to or from in-house counsel that seek both business and legal advice will not satisfy the “primary purpose” requirement. More specifically, an email that lists an attorney and a non-attorney in the “To” field may not be privileged if it has a mixed purpose (i.e. seeks both business and legal advice). Meanwhile, emails that list an in-house attorney in the “To” field and a non-attorney in the “cc” field are only privileged if the non-attorney is copied so as to notify that person that legal advice was in fact sought and what legal advice was provided. Also, emails, texts and discussions by an attorney with an opposing counsel or other third party are not privileged.

Thus, it is important to: (i) keep the primary purpose of all communications with attorneys clear and state when you are seeking legal advice; and (ii) avoid oral communications in the presence of “third parties,” or copying them on emails, texts and other correspondence.

The Colorado Court of Appeals, in Crocker v. Greater Colorado Anesthesia, P.C., recently examined several unique enforceability considerations with respect to a physician non-compete agreement.  Of particular interest was the Court’s treatment of a liquidated damages provision in the agreement.  Pursuant to a Colorado statute (8-2-113(3), C.R.S. 2017), the Court held that the provision was unenforceable because the liquidated damages were not reasonably related to the injury actually suffered.

Michael Crocker, a former physician-shareholder at Greater Colorado Anesthesia (Old GCA), signed an employment agreement with Old GCA that contained a non-compete provision that prohibited Crocker from practicing anesthesiology within 15 miles of a hospital serviced by Old GCA, for two years following termination of the agreement. The employment agreement also included a liquidated damages clause that required a former employee who violated the non-compete agreement to pay “(1) the three-year annual average of the gross revenues produced by the doctor’s practice; (2) minus the three-year annual average of the direct cost of [Old GCA] employee; (3) multiplied by two, to reflect two years of competition; and (4) plus $30,000 to cover the estimated internal and external administrative costs to terminate and replace the competing doctor.”

In January of 2015, Old GCA’s shareholders voted to approve a merger. Crocker dissented. Crocker severed his employment relationship with Old GCA and later began working for another anesthesiology group within the non-compete area outlined in his employment agreement. After the merger, New GCA sought damages for Crocker’s breach of his non-compete. The district court determined that the non-compete was unenforceable. The Court of Appeals affirmed the district court’s decision on several grounds, including hardship on Crocker and Crocker’s rights as a dissenting shareholder with respect to the merger.

The court also independently rejected New GCA’s request for liquidated damages, determining that the company suffered no damages, and that the liquidated damages clause was unenforceable because it was not reasonably related to “any injury [New GCA] actually suffered due to Crocker’s departure.” Citing the Colorado statute governing liquidated damages clauses in physician non-compete agreements, the court explained that “a damages term in a non-compete provision such as here is enforceable only if the amount . . . is reasonably related to ‘the injury suffered’ in the past tense. Under this plain language, the reasonableness of the relationship between the two amounts must be demonstrated, and it cannot be analyzed prospectively; by definition, it can only be determined upon the termination of employment.”

This case underscores the need for employers seeking to enter into restrictive covenants with their employees to consult with counsel when drafting such covenants. In the circumstances of this case, there was a state statute specifically bearing upon the liquidated damages provision in the physician non-compete agreement, which effectively prevented that provision from being enforced against the employee. The world of restrictive covenants can be tricky and compliance with state laws (statutes and case law) is crucial when the time comes to enforce them.

In managing workforces, particularly when addressing employee turnover, employers often find themselves facing issues regarding how best to safeguard their confidential business information and how to protect their relationships with clients and employees. In recent years, the legal landscape underlying these issues has been evolving, as lawmakers and judges grapple with the tension in these matters between protection and free competition.

In this Take 5, we examine recent developments, both in the courts and legislative bodies, concerning trade secrets and employee mobility:

  1. Antitrust Action Against No-Poaching Agreements: The Trump Administration Continues Obama Policy
  2. Drafting “Garden Leave” Clauses in Employment Agreements
  3. Will Insurance Cover a Company Sued in a Trade Secrets Lawsuit?
  4. Defend Trade Secrets Act Developments in 2017
  5. New and Proposed State Statutes and Federal Legislation Limiting Non-Compete Agreements

Read the full Take 5 online or download the PDF.

Consider the following scenario: your organization holds an annual meeting with all Research & Development employees for the purpose of having an open discussion between thought leaders and R&D regarding product-development capabilities. This year’s meeting is scheduled outside the United States and next year’s will be within the U.S. with all non-U.S. R&D employees traveling into the U.S. to attend. For each meeting, your employees may be subject to a search of their electronic devices, including any laptop that may contain your company’s trade secrets. Pursuant to a new directive issued in January 2018 by the U.S. Custom and Border Protection (“CBP”), the electronic devices of all individuals, including U.S. citizens and U.S. residents, may be subject to search upon entry into (or leaving) the U.S. by the CBP. CBP Directive No. 3340-049A (Jan. 4, 2018).

The directive allows for the warrantless border search of electronic devices without a showing of reasonable suspicion. It differentiates between a basic search and an advanced search. A basic search allows officers, with or without suspicion, to examine an electronic device, including an examination of the information that is resident and accessible on the device. Information that is solely stored remotely may not be accessed. An advanced search is one in which the officer connects external equipment, through a wired or wireless connection, to an electronic device in order to “review, copy, and/or analyze” the contents of the electronic device. Advanced searches are permitted where there is a “reasonable suspicion” of criminal activity or for national security concerns. While the directive states that “[m]any factors” may create a reasonable suspicion or a national security concern warranting an advanced search, it articulates examples particularly aimed at national security concerns but does not provide much color as to what may constitute reasonable suspicion of criminal activity.

By issuing the directive, the CBP appears to align its position with that of the majority of federal courts that held reasonable suspicion is not required for border searches of electronic devices. See, e.g., United States v. Ickes, 393 F.3d 501, 506-07 (4th Cir. 2005) (rejecting reasonable suspicion requirement for laptop computer searches at the border); United States v. Linarez-Delgado, 259 Fed. Appx. 506, 508 (3d Cir. 2007) (rejecting reasonable suspicion requirement for border search of electronic data). Thus, the CBP may have also sought to reject the statements by at least one other court suggesting a requirement for a showing of reasonable suspicion before search of an electronic device. See, e.g., United States v. Cotterman, 709 F.3d 952 (9th Cir. 2013) (implying that officers need reasonable suspicion to conduct a border search of complex personal computing devices).

Can’t your employees just encrypt everything before international travel? Under the directive, travelers are required to present the electronic device (and the information contained within the device) in a condition that allows for the inspection of the device and its contents. Therefore, under the directive, officers may request an individual’s assistance in accessing the device if it is encrypted or password protected, and officers are authorized to detain a device pending a determination as to its admissibility in to the U.S.; they may also exclude a device if access to it is prevented by encryption or password protection.

The directive provides officers with instructions regarding the handling of certain sensitive materials, including business information, medical records, and information protected under the attorney-client privilege. Upon encountering business or commercial information resulting from a search, such as confidential business information, officers are required to “protect that information from unauthorized disclosure[.]” Such confidential business information may only be shared with agencies or entities that have mechanisms in place to protect the information.

Companies should alert employees of the requirements under the new directive. Certain preventative steps should be considered to minimize the potential for disclosure of confidential information at the border, including: (1) minimizing the number of electronic devices with trade secret or confidential information; (2) minimizing the amount of confidential information on a device; (3) to the extent possible, using electronic devices that do not contain confidential information when international travel is required; and (4) considering whether confidential information on the device should be encrypted but with the knowledge that CBP may request that the device be unlocked. Companies should also be cognizant of other issues relating to encrypted devices, including U.S. export control requirements for traveling to certain countries and licenses that may be required for individuals traveling into certain countries with an encrypted device.

In the event of an inspection request by an officer, your employees should be prepared to alert the officer that the device contains confidential business information in order to protect against its disclosure. Employees should also carry company business cards to show officers requesting an inspection that they are an employee of your company.

Several states in recent years have enacted laws that have been designed, in varying degrees, to limit non-competes, including California, Illinois, and Nevada. Which states and cities are most likely to do the same in 2018?

The New Hampshire and New York City legislatures have introduced bills that seek to prohibit the use of non-compete agreements with regard to low-wage employees. Under New Hampshire’s Bill (SB 423), a “low-wage employee” is defined as one who earns $15.00 per hour or less.  The New Hampshire Bill was introduced on January 24, 2018 and is scheduled for a hearing in February.  Under New York City’s bill (Introduction 1663), a “low-wage employee” means all employees except for manual workers, railroad workers, commission salesmen, and workers employed in a bona fide executive, administrative, or professional capacity whose earnings are in excess of $900 dollars a week. In addition, the New York City Bill would prohibit employers from “requir[ing] a potential employee who is not a low-wage worker to enter into a covenant not to compete, unless, at the beginning of the process for hiring [the employee], [the] employer disclos[es] in writing that [the employee] may be subject to such a covenant.”  The New York City Bill was introduced by the City Council on July 20, 2017 and filed on December 31, 2017.

Other more sweeping proposals to restrict the use of all non-compete agreements have been introduced in Pennsylvania and Vermont.  The scope of Vermont’s Bill (HB 556) appears to be broader than Pennsylvania’s and prohibits, with exceptions, any agreement “not to compete or any other agreement that restrains an individual from engaging in a lawful profession, trade, or business.” HB 556 was introduced on January 3, 2018 and is currently in Committee.  Pennsylvania’s Bill (HB1938) prohibits (also subject to some exceptions), an agreement between an employer and employee that “is designed to impede the ability of the employee to seek employment with another employer.” The Bill includes provisions that would award attorneys’ fees and damages (including punitive damages) to those employees who prevail in litigation against an employer concerning the non-compete. HB 1938 also would require that any litigation involving a resident of Pennsylvania be decided in a Pennsylvania state court under Pennsylvania law.  The Pennsylvania Bill was introduced and referred to Committee on November 27, 2017.

Massachusetts and Washington have also introduced legislation that would add requirements for employers seeking to use non-compete agreements. In Massachusetts, six separate bills have been introduced, three of which (HB 2371, SB 840, and SB 1017) would require employers to include a “garden leave clause” (or “other mutually agreed upon consideration”) in the non-compete agreements.  The garden leave clause would require employers to pay former employees, on a pro rata basis, either 50 percent (under HB 2371) or 100 percent (under SB 840 and SB1017) of their earnings for the duration of the restricted period.  The Massachusetts Bills were introduced and referred to Committee on January 23, 2017.  In Washington, lawmakers recently introduced a bill (HB 1967) which would require employers to “disclose the terms of the [non-compete] agreement in writing to the prospective employee no later than the time of the acceptance of the offer of employment or, if the agreement is entered into after the commencement of employment, the employer must provide independent consideration for the agreement.”  Additionally, HB 1967 would allow an employer to recover actual damages, statutory damages of $5,000, and attorneys’ fees and costs if an employer requires an employee to sign a non-compete agreement that contains provisions that the “employer knows are unenforceable.”  The Washington Bill was introduced in the House on February 2, 2017 and now is in Committee in the Senate.

At this point it is too early and difficult to predict whether the proposed laws will garner enough support to clear the necessary legislative and executive hurdles to be enacted. Sometimes state bills seeking to restrict the use of non-competes fail to gain enough traction.  Indeed, in 2017 both Maryland’s HB 506 and New Jersey’s SB 3518 died in their respective legislative houses soon after being introduced; Massachusetts especially has a track record of introducing bills intended to limit the use of non-compete agreements that fail to become laws.  Of the bills still in play, the Washington bill is furthest along and seems like it may get passed, though it too may die in Committee.  In any event, employers across all states (and in these states especially) should stay tuned and continue to draft narrowly tailored and enforceable non-competes.

Epstein Becker Green attorneys Peter A. Steinmeyer, Robert D. Goldstein, and Brian E. Spang are pleased to be presenting 2017 Year in Review: Trade Secrets and Non-Compete Developments webinar on Wednesday, December 6, 2017 from 1:00 p.m. — 2:15 p.m. with Practical Law.

This webinar will provide insights into recent developments and expected trends in the evolving legal landscape of trade secrets and non-competition agreements. This webinar will focus on how to navigate this continually developing area and effectively protect client relationships and proprietary information.

Topics will include:

  • A review of recent developments and litigation trends under the Defend Trade Secrets (DTSA) since its enactment in 2016.
  • Newly passed state statutes addressing restrictive covenants, including who can enter into them, industry restrictions, and temporal restrictions.
  • Increased usage of “garden leave” clauses in lieu of non-competes.
  • Recent decisions regarding restrictive covenants, including whether a LinkedIn “invitation to link” is an improper solicitation.
  • Significant recent trade secret cases, including the level of detail required when pleading the existence of a trade secret.
  • Administrative agency developments regarding confidentiality clauses, including shifting agency trends under the Trump administration.
  • When are employers actually filing suit against former employees?

Click here for more information and to register for the webinar.