In a case with significant ramifications for employers concerned with protecting sensitive information, and for employees accused of abusing access to computer networks, the United States Supreme Court (“SCOTUS”) heard oral argument this week in Van Buren v. United States, No. 19-783, a case from the Court of Appeals for the Eleventh Circuit that will require interpretation of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030.  The argument was lively.  All of the Justices asked questions, and several expressed concern about vagueness in the CFAA’s definition of covered activity.  Much of the discussion centered on an alleged “parade of horribles,” and on the meaning of the word “so.”  We expect a relatively prompt decision.  Time will tell what SCOTUS will decide, but we would not be surprised to see a reversal and remand.

The CFAA has been a useful litigation tool for employers when confidential or other sensitive information accessed via computer is misappropriated, misused, or otherwise compromised. The CFAA generally prohibits obtaining sensitive information from a computer without authorization, or by exceeding authorized access, and, importantly, confers federal jurisdiction.  While it is a criminal statute, it also provides for a private right of action for those damaged by certain violations.  The issue now before SCOTUS in Van Buren is whether the CFAA is violated when someone with authorized access obtains information for an unauthorized purpose.  For example, when an employee who is authorized to access and use the employer’s computer-stored customer information for business purposes downloads the information to a thumb drive and shares it with a potential new employer, s/he plainly violates company policy.  But does s/he run afoul of the CFAA? Over time, a Circuit split has developed regarding this issue.

Van Buren is a criminal case in which Petitioner Nathan Van Buren, a police sergeant in Cumming, Georgia, was convicted of violating the CFAA.  The Eleventh Circuit affirmed his conviction and SCOTUS granted certiorari.  Briefly stated, as part of his duties Van Buren was granted authorized access to a database containing license plate and vehicle registration information maintained by the Georgia Crime Information Center (“GCIC”).  Training materials supplied to those with access to the GCIC database quite reasonably prohibit use of the database for personal purposes.  However, in return for cash payments, Van Buren agreed to, and did, use his authorized GCIC username and password to access a woman’s license and registration information in order to learn personal information about her on behalf of another individual.  There is no dispute that such use was not within the GCIC guidelines for authorized use. Accordingly, Van Buren used his authorized access to the GCIC database for an unauthorized purpose.  He was charged with, among other things, violating the CFAA.  He was convicted of the CFAA violation, sentenced to 18 months in prison, and he appealed.  The Eleventh Circuit court upheld the conviction, holding, based on precedent within the Circuit, that the unauthorized use of authorized access does constitute a violation of the CFAA.

Because Van Buren was not an outsider or other unauthorized user hacking into the GCIC database, his conviction under the CFAA turns on application of the facts to the CFAA’s prohibition on “exceeding authorized access.” The CFAA defines “exceeds authorized access” to mean “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.”  18 U.S.C. 1030(e)(6) (emphasis added).  Generally, the First, Fifth, Seventh and Eleventh Circuits construe the definition broadly, finding CFAA violations against employees, for example, who access information they are entitled to obtain for certain purposes, but do so for unauthorized uses.  In other words, courts in those Circuits tend to focus on the purposes of authorized access and require computer users to stay within those purposes in order to avoid violations of the CFAA.  This interpretation would allow an employer to bring an action under the CFAA against an employee who, for example, misappropriates sensitive business information s/he was entitled to access as part of his or her job for use with a subsequent employer.  The Second, Fourth and Ninth Circuits, on the other hand, favor a narrower interpretation, in which there is no violation unless the accessed information at issue is, itself, not information the user is entitled to obtain or access at all.  Under that construction, an employee who obtains information from a database s/he is not otherwise permitted to use (e.g. restricted Human Resources information by someone not within the permitted sphere) would violate the CFAA while someone who misuses information s/he is otherwise entitled to access would not.

Van Buren is the first case to present the issue to SCOTUS.  Petitioner, with robust amici support from organizations like Reporters Committee for Freedom of the Press, National Whistleblower Center and technology companies, largely focused his arguments on the dangers of a “parade of horribles” that could arise from the broader interpretation. (See, e.g., Oral Argument at 8).  Petitioner posited that, for example, computer users who check Instagram on their work computers in violation of their employer’s computer use policies, or those who inflate their characteristics on a dating site, in violation of the stated terms of use of such sites, could be guilty of a federal crime should the Government choose to prosecute.  (Oral Argument 4, 22).  He argued that the CFAA is impermissibly vague and that any changes should be left to Congress.

The Government’s position that the CFAA should be broadly read was also supported by several amici, including the Electronic Privacy Information Center and the Digital Justice Foundation.  The Government contended that, pursuant to the definition, a user “exceeds authorized access” by accessing information that s/he did not have a right to access in the particular manner or circumstances used.  Thus, Van Buren violated the CFAA, according to the Government’s position, because he accessed the GCIC under circumstances other than for law enforcement purposes.  As part of its argument, the Government closely examined the meaning of the word “so” in the definition of “exceeds authorized access,” and contended that a person is “entitled so” to do something only when s/he has a right to do it in the particular manner or circumstance authorized.  Brief for the United States at 13.  Van Buren, on the other hand, contended that “so” refers only to “access[ing] a computer with authorization” such that an individual does not “exceed authorized access” if entitled to access the database in question at all. (Oral Argument at 21).

The questions from the Justices during oral argument closely followed those competing themes, further discussing the proper construction of the word “so,” and examining whether some of the more innocuous-sounding activities would actually constitute violations of the CFAA under the broader construction.  Some expressed concern about the privacy of the public if the CFAA is not construed to encompass, for example, government employees reviewing private information for purposes other than those called for in their jobs.  Oral Argument at 14.  Based on the overall tenor of the argument, SCOTUS may be prepared to agree with the more narrow interpretation currently favored by the Second, Fourth and Ninth Circuits, and to overturn Van Buren’s criminal conviction that turned on the broader interpretation. In any case, we will watch for a decision.

We observe use of the CFAA in civil cases to already be diminished in the last four years.  Passage of the Defense of Trade Secrets provides access to federal courts in circumstances where the CFAA was used to create federal jurisdiction.  And as explained above, use of the CFAA in such cases has been curtailed in several Circuits. It will be interesting to see whether the SCOTUS decision in Van Buren further restricts its utility.

The Court of Appeals for the Sixth Appellate District of Texas at Texarkana issued an opinion on November 24, 2020 in Titan Oil & Gas Consultants LLC v. David W. Willis and RIGUP, Inc., a case addressing application of a non-competition provision in the independent contractor context in the oil and gas drilling and production industry in the Permian Basin and elsewhere. Titan addressed non-competition claims of interest both to those focused on the Texas arcana of the state’s restrictive covenant statute and jurisprudence and to those more generally interested in applying restrictive covenants to independent contractors.  Each area of interest is worth examining.

A. Tex. Arcana Around The State’s Restrictive Covenant Statute And Jurisprudence Explained

First, let’s look at the Texas law issues.  Texas covenants not to compete are governed by TEX. BUS. & COMM. CODE Section 15.50(a):

(a) Notwithstanding Section 15.05 of this code, and subject to any applicable provision of Subsection (b), a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

Texas courts have read this as requiring “two inquiries: ‘[f]irst, we determine whether there is an ‘otherwise enforceable agreement’ between the parties, then we determine whether the covenant is ‘ancillary to or part of’ that agreement.’” [citations omitted] and then the court must determine that “the covenant not to compete is ancillary to or part of an otherwise enforceable agreement.” Titan Op. at 9-10.  Thus, “’the employer must establish both that (a) the consideration given by the employer in the agreement is reasonably related to an interest worthy of protection and (b) the covenant not to compete was designed to enforce the employee’s consideration or return promise in the agreement.’…’Unless both elements of the test are satisfied, the covenant cannot be ancillary to or a part of an otherwise enforceable agreement, and is therefore a naked restraint of trade and unenforceable…The covenant cannot be a stand-alone promise from the employee lacking any new consideration from the employer.’” Titan Op. at 9-10.

To do that analysis, the Titan court relied principally on Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), and Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642 (Tex. 1994).  The latter, Light, had illuminated the requirements, holding that:

in order for a covenant not to compete to be ancillary to an otherwise enforceable agreement between employer and employee: (1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer’s interest in restraining the employee from competing; and (2) the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement. Unless both elements of the test are satisfied, the covenant cannot be ancillary to or a part of an otherwise enforceable agreement, and is therefore a naked restraint of trade and unenforceable.

[Light, 883 S.W.2d at 647]

In the former case, Marsh, 354 S.W.3d at 774-777, the Texas Supreme Court muddied the analysis by arguably eliminating, perhaps, the first (or “give rise”) element of Light’s test, according to the Titan Court (at 11-13).  But the Titan Court concluded that it need not settle that debate, as the second, “covenant must be designed to enforce the employee’s consideration” prong was still a requirement after Marsh, and Titan could not satisfy that necessary element. Id.

B. The Titan Non-Compete Clause Falls Short

While the factual reasons that the Titan clause fell short of the Marsh/Light requirements were important under Texas law, they may also point to issues employers, staffing agencies, prime contractors, and others who place independent contractors may face even outside Texas.  In Titan, the defendant, David Willis, was contacted directly by Titan’s customer, Apache Corporation, and solicited to join one of its “completions” teams, and then during the engagement Apache provided its confidential information and needs directly to Willis without Titan acting as intermediate, conduit or guarantor of confidentiality.  According to the Court’s opinion, Titan’s connection was an afterthought: “Rather, the undisputed evidence shows that Apache contacted Willis to be a part of its completions team and that Titan subsequently contacted Willis to carry his insurance and administrate payroll while he worked at Apache. Thus, Willis did not gain access to Apache and its confidential information through Titan or because of Titan’s relationship with Apache.” Titan Op. at 16.  As the Titan Court noted, “This is not a case where in exchange for a promise not to disclose confidential information, the employer expends money and resources to provide the employee with specialized training or the employee gains access to the employer’s clients and their confidential information because of the employer’s relationship with its clients.” Id.

While Titan’s contract appeared to have all the right boilerplate language, arguments based on such language lost steam when the facts revealed that Titan was not the source or conduit of referral or confidential information, had not added defendant to its approved contractor list, and had never presented defendant’s credentials to any other Titan customer or client. Titan Op., at 16; see also id. at 4, fn, 2-3 and accompanying text.  Whether inside or outside Texas, and whether one is dealing with employees or independent contractors, documenting the company’s role in providing such workers the actual work opportunity and the ability to fulfill it remains important to justifying the enforcement of such restrictive covenant.  That is true in states like Texas with formal statutory linkage requirements and in purer common law jurisdictions where judges seek evidence showing employers or prime contractors have provided real value, access and opportunity rather than having just sought to curtail competition as a matter of contractual course.

The 2020 update to our Practice Note, “Garden Leave Provisions in Employment Agreements,” is now available from Thomson Reuters Practical Law.  We discuss garden leave provisions in employment agreements as an alternative or a companion to traditional employee non-compete agreements.

Following is an excerpt (see below to download the full article in PDF format):

In recent years, traditional non-compete agreements have faced increasing judicial scrutiny, with courts focusing on issues such as the adequacy of consideration, the propriety of non-competes for lower level employees, and whether the restrictions of a non-compete are justified by a legitimate business interest or are merely a tool used to suppress competition.

Momentum continues at the state level to pass laws restricting non-competes in various ways. Several states have passed legislation essentially banning non-competes for low-wage workers. Other states have limited noncompetes for other categories of workers, such as technology sector workers and medical professionals. Massachusetts passed comprehensive non-compete legislation in 2018 that limits the enforceability of most non-compete agreement (see Statutorily Required “Garden Leave”). In other states, such as California, almost all post-employment non-competes are unenforceable (Cal. Bus. & Prof. Code § 16600-16602.5). …

Against this backdrop, employers are seeking alternatives to traditional non-competes to protect their proprietary information and customer relationships. One alternative is the use of garden leave provisions in employment agreements. Garden leave provisions extend the employment relationship for a period of time during which the employee continues to receive a salary (and sometimes benefits) but cannot go to work elsewhere.

While garden leave provisions are not a panacea, they may serve as a helpful tool that employers can use to protect their legitimate business interests and prevent certain employees from immediately working for a competitor.

This Practice Note addresses:

  • The history and general characteristics of garden leave in the US.
  • Comparisons between traditional non-competes and garden leave provisions.
  • Advantages and disadvantages of garden leave.
  • Drafting considerations for employers that want to use garden leave provisions, including potential issues under:

–– Section 409A of the Internal Revenue Code (Code); and

–– the Consolidated Omnibus Budget Reconciliation Act (COBRA).

Download the full Practice Note in PDF format here.

In Payward, Inc. v. Runyon, Case No. 20-cv-02130-MMC, the United States District Court for the Northern District of California granted a Rule 12(b)(6) motion, ruling that information alleged to be “secret” failed to qualify as a “trade secret” under the Defend Trade Secrets Act.  The Court applied California and federal precedent explaining trade secret information confers a competitive business advantage, and found the complaint lacked any such allegations.  The decision make sense given the particular allegations in the case.  But does a “competitive business advantage” requirement comport with a strict textualist reading of the DTSA?

The facts are unique.  Plaintiff Payward operates a global cryptocurrency exchange.  Payward alleged in its Complaint that it keeps the physical address of its office secret, in order to protect against “physical security threats.”  Payward alleged by way of example “a recent spate of kidnappings” of people who worked for cryptocurrency exchanges.  Payward alleged Defendant Runyan, a former Payward employee, disclosed Payward’s physical address in a complaint Runyan filed in state court asserting wrongful termination claims.  In federal court Payward alleged Runyan’s disclosure of Payward’s physical address constituted trade secret misappropriation under the DTSA.  Runyan moved to dismiss pursuant to Rule 12(b)(6), arguing that Payward’s physical address was not a “trade secret.”

DTSA defines “trade secret” in 18 U.S.C. § 1839(3):

the term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information … whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—

    1. the owner thereof has taken reasonable measures to keep such information secret; and
    2. the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information (Emphasis added).

The Court appeared to assume that Payward’s physical address qualified as “business … information,” and that Payward took reasonable measures to keep its physical address secret.  The Court focused on the “independent economic value” requirement, reading that language to mean business information that confers a strategic advantage over business competitors.  The Court quoted a California appellate court case holding that “the focus of the inquiry regarding the independent economic value element is on whether the information is generally known to or readily ascertainable by business competitors or others to whom the information would have some economic value.” (Emphasis added, quoting Altavion, Inc. v. Konica Minolta Systems Labroatory, Inc., 226 Cal. App. 4th 26, 62 (2014), and noting the DTSA is “largely modeled after the Uniform Trade Secrets Act” and the definition of “trade secret” in the DTSA is “substantially identical” to the California Uniform Trade Secret Act definition, citations omitted).  The Court further observed that cases analyzing the “independent economic value” requirement “most often consider the degree to which the secret information confers a competitive advantage on its owner,” and that “independent economic value ‘has been interpreted to mean that the secrecy of the information provides a business with a substantial business advantage.’”  (Emphasis added, citations and internal marks omitted).

Against this backdrop, the Court had little trouble ruling Payward’s physical address was not a trade secret.  The Court focused on the fact that Payward did not allege “how its competitors would gain an economic advantage by learning Payward’s physical address.”  (Emphasis added).  That Payward allegedly kept its physical address secret was not enough, by itself, to meet DTSA’s statutory definition of “trade secret.”

Query, however, whether the Court’s decision comports with a strict textualist analysis.[1]  Repeating the relevant provision of the “trade secret” definition:

the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information  (Emphasis added).

The definition does not specifically refer to a business competitor, or a competitive business advantage.  It merely refers to “another person who can obtain economic value from the disclosure … of the information.”  (Emphasis added).  The “business advantage” and “business competitor” language in the decisions quoted by the Court are logical judicial glosses applied to the statute, but judicial glosses nonetheless.

Could Payward have alleged different facts to meet the statutory definition?  Consider this law school-esque hypothetical: Payward’s Complaint alleges Runyon sold Payward’s physical address to erstwhile kidnappers.  The kidnappers actually kidnapped a Payward executive, and Payward paid a ransom in exchange for her safe return.  Wouldn’t the information have independent economic value from not being generally known, and wouldn’t the kidnappers fall within the plain language of “another person who can obtain economic value from the … use of the information?”  The “trade secret” definition in the DTSA, if read in a strict textualist manner, might lead to a surprising holding.

******************************************************************************************************************************************

[1]  In 2015 Justice Kagan famously remarked “I think we’re all textualists now.”  Harvard Law School, The Antonin Scalia Lecture Series:  A Dialog with Justice Elena Kagan on the Reading of Statutes, YouTube (Nov. 25, 2015) (https://www.youtube.com/watch?v=dpEtszFT0Tg).

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

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

The operative complaint alleged the Biogen-Forward agreement was a restraint of trade in violation of § 16600, which states “except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  The district court dismissed the complaint finding the Biogen-Forward agreement must be analyzed under the antitrust rule of reason and that § 16600 does not apply outside of the employment context.

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

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

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

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

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

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

This Q&A addresses enforcement and drafting considerations for restrictive covenants such as post-employment covenants not to compete and non-solicitation of customers and employees. Federal, local, or municipal law may impose additional or different requirements.

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

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

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

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

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

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

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

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

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

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

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

 

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

Who Qualifies as a “Low-Wage” Employee?

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

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

What Agreements Are Covered?

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

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

How Is the Law Enforced?

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

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

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

What About Covenants Entered Into Before July 1, 2020?

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

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

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