We just published an article with Thomson Reuters Practical Law discussing non-compete agreements between employers and employees for private employers in Illinois. With Thomson Reuters Practical Law’s permission, we have attached it here.
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:
- Antitrust Action Against No-Poaching Agreements: The Trump Administration Continues Obama Policy
- Drafting “Garden Leave” Clauses in Employment Agreements
- Will Insurance Cover a Company Sued in a Trade Secrets Lawsuit?
- Defend Trade Secrets Act Developments in 2017
- New and Proposed State Statutes and Federal Legislation Limiting Non-Compete Agreements
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.
We just published an article with the Practical Law Company discussing garden leave provisions in employment agreements. With PLC’s permission, we have attached it here.
When: Thursday, September 14, 2017 8:00 a.m. – 4:30 p.m.
Where: New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019
Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:
- Global Executive Compensation
- Artificial Intelligence
- Internal Cyber Threats
- Pay Equity
- People Analytics in Hiring
- Gig Economy
- Wage and Hour
- Paid and Unpaid Leave
- Trade Secret Misappropriation
We will start the day with two morning Plenary Sessions. The first session is kicked off with Philip A. Miscimarra, Chairman of the National Labor Relations Board (NLRB).
We are thrilled to welcome back speakers from the U.S. Chamber of Commerce. Marc Freedman and Katie Mahoney will speak on the latest policy developments in Washington, D.C., that impact employers nationwide during the second plenary session.
Morning and afternoon breakout workshop sessions are being led by attorneys at Epstein Becker Green – including some contributors to this blog! Commissioner of the Equal Employment Opportunity Commission, Chai R. Feldblum, will be making remarks in the afternoon before attendees break into their afternoon workshops. We are also looking forward to hearing from our keynote speaker, Bret Baier, Chief Political Anchor of FOX News Channel and Anchor of Special Report with Bret Baier.
We just published a Practice Note with the Practical Law Company discussing litigation for employers whose employees have misappropriated trade secrets. With PLC’s permission, we have attached it here.
California has always been a challenging jurisdiction for employers in terms of limiting unfair competition by former employees and protecting trade secrets. However, employers in the state can significantly enhance their ability to protect their business interests in these areas with a little planning and strategic thinking.
In this issue of Take 5, we look at some proactive steps that employers can take to prevent unfair competition by departed employees and protect trade secrets from misappropriation:
- Critical Importance of Realistically Identifying and Protecting Trade Secrets and Confidential Information
- Developing a Plan for Employee Departures in California
- California Non-Competes: Things You Can Do “Around the Edges”
- What Will Not Work to Protect Trade Secrets or Enforce Non-Competes in California
- View from the Courtroom: What to Expect When You Try to Get a TRO in Your Unfair Competition Case
Whether you are a young child missing teeth, or a grown-up taking account of her life, or Santa Claus himself checking up on everyone else’s life, many of us make lists at holiday time. They can be lists of gifts we want, or those we need to get, or people we wish to see or write to, or things we need or want to do before the end of the year. Sometimes they are just lists of things that happened this year or that we want to happen next year. Certainly there are lots of “Top Ten” holiday lists. This one may be neither an exception nor exceptional, but here is a “Top Ten List of Holiday-Related Trade Secret/Non-Compete Cases”:
- “It may be better to be naughty than nice”—In Ivy Mar Co., Inc. v. CR Seasons Ltd., 907 F. Supp. 547 (EDNY 1995), the Court denied plaintiff a preliminary injunction in a non-compete/trade secret case in large part because of plaintiff’s months-long delay in bringing the action. This occurred notwithstanding plaintiff’s claim that it only delayed filing the action so as not to ruin Christmas—“they delayed bringing this motion because they feared defendant Jetmax would not ship goods to its customers during the Christmas season,” or so they claimed.
- “Or maybe not.”—In Agero Inc. v. Rubin et al., an appellate court in Massachusetts affirmed dismissal of plaintiff’s claims, holding that Agero failed to establish that two of the defendants, Timothy Schneider and Matthew Capozzi, owed Agero a duty of loyalty. Though the Court when on at some length as to the reasons it had for affirming the result against Agero, what was perhaps most telling was the Court’s taking the time to express a reason that it was not relying on:
- We need not comment on the defendants’ suggestion that Agero brought this complaint against them, despite Agero’s size and apparent lack of interest in pursuing ViewPoint, to send a message to other Agero employees who might entertain thoughts of leaving and lawfully competing. That Agero reportedly sued Schneider on Christmas Eve, when Schneider’s oldest child was five years old, might lend credence to the charge. However, we do reiterate that noncompetition agreements would be the better practice to achieve that goal. Based on the record before us, Agero’s claims were properly dismissed.
- “Check your list twice”—If you think departing employees had accomplices or other help, don’t just add a bunch of John Does to your complaint without defining and describing who those co-conspirators are. Otherwise you run the risk of having those claims dismissed and those avenues of discovery shut down in your non-compete or trade secret case just as happens in other types of cases, such as Southwest Materials Handling Co. v. Nissan Motor Co., 2000 U.S. Dist. LEXIS 16275 (N.D. Tex. 2000), where the court said, with respect to civil conspiracy allegations against John Doe defendants, that “[t]his Court is not in the position of channeling or divining potential co-conspirators who are presently as tangible as Santa Claus, the Easter [B]unny or the Tooth Fairy.” I guess the court did not find the testimony of Frank Church credible.
- “What is the secret to making a good snowman?”—Though there is now a patent on for an apparatus for facilitating the construction of a snow man/woman out of snow, making snowman holiday decorations has also spawned litigation like the case of Gemmy Industries Corporation v. Chrisha Creations Limited, Dist. Court, SD New York 2004. In Gemmy, plaintiff claimed that defendant’s marketing of an inflatable snow man, among other causes of action, violated plaintiff’s trade secrets, especially after defendant hired plaintiff’s former sales representative. But the court concluded that even plaintiff did not treat the snowman and its marketing as involving trade secrets since plaintiff “did not request and [the sales representative] did not execute any non-disclosure agreement, non-compete agreement or confidentiality agreement prior to acting as a sales representative for [plaintiff].”
- “‘It was always said of him, that he knew how to keep Christmas well, if any man alive possessed the knowledge.’”—Dickens’ closing words in A Christmas Carol were a celebration of the Christmas spirit, and sharing but not everyone wants to share the knowledge they have about Christmas traditions. While some have asked, we think tongue in cheek, whether Christmas may be patented, it does appear that at least some aspects of our Christmas traditions can be protected as trade secrets. In the case of IPI, INC. v. Monaghan, 2008 Ohio 975 (Court of Appeals, 6th Appellate Dist. 2008), an Ohio Court found that plaintiff had stated a claim for relief, and could proceed to trial, on a claim that plaintiff’s unique methods of “‘event’ photography” such as involved in its “Santa Claus programs” could involve protectable trade secrets under the Ohio Trade Secrets Act, where plaintiff had alleged that “it developed, inter alia, ‘confidential and specialized techniques for event photography, a business marketing plan for its franchisees, a training program, and proprietary and confidential software that it makes available to its franchise systems’” and that “appellees/cross-appellants misappropriated these systems, techniques, etc., that is, its alleged trade secrets. If it is shown that these are truly trade secrets and that appellees/cross-appellants misappropriated the same, IPI would be directly injured by that misappropriation.”
- Not all courts, however, are willing to give litigants credit for the alleged uniqueness of their holiday-related ideas. This can be seen in Oxenhandler v. Dime Sav. Bank of Brooklyn, 33 Misc. 2d 626 (NY Supreme Court 1962), where plaintiff was denied relief in his trade secret/business information claims against the financial institution to which he had suggested “a ‘Chanukah Savings Plan’ which could be made available to [the bank’s] Jewish depositors in the same manner that a Christmas Club had been available to the general public.” In fact, the Court concluded that “plaintiff’s idea was neither new, novel, original nor concrete,” and that the Court “cannot perceive how plaintiff on any theory in law can succeed in this action.” New settings for Christmas Savings Clubs faired no better as alleged trade secrets or protectable ideas either, as seen in Moore v. Ford Motor Co., 43 F. 2d 685 (2nd Cir. 1930). There, plaintiff Moore sought to protect the idea of Christmas Club accounts as a way to save for down payments on automobiles. The Court concluded that there was nothing secret or unique about such a plan, and that “idea was old in Christmas Savings clubs” for some time.
- “Beware the office Christmas party.”—Normally this is a phrase you see in HR guides, but it can also hold true in the non-compete area of the law as seen in Plastic Surgery Associates Of Kingsport Inc. v. Pastrick, a 2015 decision of the Tennessee Court Of Appeals 2015. In this case, the court held that the defendant was indeed an employee and an owner of the plaintiff medical practice, and subject to the express terms of his employment agreement (including its non-compete provisions) and liable as an owner for a portion of the practice’s debts. The court rested its conclusions of ownership on three key facts, one of which was that defendant “hosted a Christmas party at his home that was billed to the company.” Unless that party was epic, it probably would have been cheaper to pay for the punch and appetizers out of his own pocket. It would have eliminated that troublesome fact and helped him avoid the necessity of disgorging $246,633.00.
- “Christmas cards, why bother?”—In Vizant Technologies, LLC v. Whitchurch, 97 F. Supp. 3d 618 (ED Pa. 2015), plaintiff brought a ten-count complaint against defendant alleging misappropriation of trade secrets in violation of the Delaware Uniform Trade Secrets Act (“DUTSA”) as well as two violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), breach of contract, defamation, tortious interference with existing and prospective relationships, abuse of process, conversion, fraud, and civil conspiracy. Finding that defendant was using confidential information and otherwise acting tortiously in contacting plaintiff’s (i.e. her former employer’s) employees, officers, and directors, and with their family members, and in interfering with plaintiff’s business with customers. This resulted in Whitchurch’s being enjoined from carrying through on her stated “intention to send a ‘Christmas card direct mail piece’” out further criticizing Vizant and its principals to that same audience.
- “New Year’s resolutions should be thought out.”—Many times, employees will decide to leave for new employment after the upcoming holidays pass. So it was in Alexander & Alexander v. Wohlman, 578 P. 2d 530 (Wash: Court of Appeals, 1st Div. 1978), where “[b]etween Christmas 1975 and New Year’s Day 1976, the defendants decided to leave the employment of A&A.” The problem was not their resolve to leave, but the things that they did before they left:
- On Friday afternoon, January 16, 1976, after Mr. Maier, the manager of the Seattle office, had left for the weekend, they submitted their letters of resignation and took with them personal possessions and certain schedule books for use as forms in the conduct of their business. Between January 12 and 16, 1976, each of the defendants personally contacted clients of theirs to inform them of their decision to leave A&A and the formation of the new firm, Wohlman & Sargent, Inc. On January 17 and 19 defendants sent letters to clients requesting broker-of-record letters.
- The appeals court found that such conduct did violate their legal obligations to A&A, and found them liable for damages.
- “Sometimes you get coal in your stocking.”—Courts often work through the holidays, despite the general impression to the contrary. For instance, in Direx Israel, Ltd. v. Breakthrough Medical Corp., 952 F. 2d 802 (4th Cir. 1991), plaintiff obtained a preliminary injunction from the District Court against the defendant who, when he was discharged, illegally appropriated and exploited the plaintiffs’ trade secrets, and were using such trade secrets to manufacture, with intent to market, a machine competitive with the plaintiffs’ product. The 4th Circuit reversed the grant of the preliminary injunction, but did so “without prejudice to the right of the plaintiffs to renew such motion on the basis of any new or additional facts that may have occurred since the grant under review.” The appellate court’s decision issued on December 24th. Likewise, in Viad Corp. v. Cordial, 299 F. Supp. 2d 466 (WD Pa. 2003), the Court issued a Christmas Eve denial of a preliminary injunction request in case in which Defendants Cordial and Hellberg were alleged to have violated their employment contracts, which prohibited them from competing with plaintiff directly or indirectly, or aiding its competitors, for a period of one year following the termination of their employment, though in the holiday spirit the Court pointed out that plaintiff and defendants had been “represented by counsel who tried the matter skillfully and efficiently.”
- “Sometimes, though, you get what you asked for.”—In Devos Ltd. v. Record, Dist. Court, ED New York 2015, on the other hand, the court issued on Christmas Eve a wide ranging injunction against defendants in a trade secret misappropriation and unfair competition case even though the plaintiff had been indicted and had been placed on a federal exclusion list that meant that no federal agency can do business with plaintiff and that any pharmaceutical distributor who receives federal funding, including Medicare and Medicaid (which includes almost every distributor of pharmaceuticals), also cannot do business with plaintiff. Concluding that an indictment was just an accusation of being naughty rather than a finding of same, the court issued the injunction. There was no mention of where Santa had come out when double checking Devos’ placement on his list.