Joining many other states that in recent years have enacted laws regarding physician non-competition agreements, Indiana recently enacted a statute that will place restrictions on such agreements which are originally entered into on or after July 1, 2020.

Under Pub. L. No. 93-2020 (to be codified in part as Ind. Code § 25-22.5-5.5) (2020), which will take effect on July 1, 2020, for a non-compete to be enforceable against a physician licensed in Indiana, the agreement must contain the following provisions:

  1. A provision that requires the employer of the physician to provide the physician with a copy of any notice that (A) concerns the physician’s departure from the employer, and (B) was sent to any patient seen or treated by the physician during the two year period preceding the end of the physician’s employment or contract.
  2. A provision that requires the physician’s employer to, in good faith, provide the physician’s last known or current contact and location information to a patient who (A) requests such information and (B) was sent to any patient seen or treated by the physician during the two year period preceding the end of the physician’s employment or contract.
  3. A provision that provides the physician with (A) access to or (B) copies of any medical record associated with a patient described above upon receipt of the patient’s consent.
  4. A provision that provides the physician with the option to purchase a complete and final release from the terms of the non-compete at a reasonable price.
  5. A provision that prohibits the providing of patient medical records to a requesting physician in a format that materially differs from the format used to create or store the medical record during the routine or ordinary course of business, unless mutually agreed otherwise.

As is clear from these requirements, preserving a patient’s right to choose a physician, including by continuing to be seen or treated by a physician departing from a particular practice, was an important factor considered by Indiana legislators.  Also, given that Indiana law rarely allows for judicial modification of restrictive covenants, this new statute will be onerous for practices/employers who do not pay close attention to drafting their non-compete agreements.

A recent decision issued by the U.S. District Court for the Northern District of California, San Jose Division, presents a stark example of what can result when a defendant accused of trade secret misappropriation is careless in preserving electronically stored information (“ESI”) relevant to the lawsuit.

Silicon Valley-based autonomous car startup WeRide Corp. and WeRide Inc. (collectively, “WeRide”) sued rival self-driving car company AllRide.AI Inc. (“AllRide”), along with two of its former executives and AllRide’s related companies, asserting claims for misappropriation under the federal Defendant Trade Secrets Act and the California Uniform Trade Secrets Code, along with numerous other claims.  WeRide secured a preliminary injunction from the Court, directing AllRide not to use or disclose WeRide’s confidential information and trade secrets, and specifically directing defendants not to destroy evidence.

Discovery showed that the defendants did not heed the Court’s injunction, instead engaging in what the Court called a “staggering” amount of spoliation, much of which AllRide conceded.  The spoliation included:

  • Failure to disable a 90-day automatic deletion of emails in AllRide’s computer system;
  • Destruction of email accounts assigned to or used by the individual defendants;
  • Destruction of the source code alleged to have been stolen; and
  • Wiping clean one laptop and deleting files from another laptop.

Evaluating defendants’ actions under Federal Rules of Civil Procedure 37(b) and 37(e), the Court issued terminating sanctions against AllRide and the individual defendants, striking their answers and entering defaults against them, and holding that they must pay WeRide’s attorneys’ fees relating to discovery and motion practice regarding the spoliation.

Although an extreme example, this decision serves as a reminder of the importance of preserving ESI, even when litigation is a possibility.

When Massachusetts enacted the Massachusetts Noncompetition Agreement Act (“MNCA”) in mid-2018, some commentators suggested that the statute reflected an anti-employer tilt in public policy. But, we advised  that sophisticated employers advised by knowledgeable counsel could navigate the restrictions set forth in the MNCA.  As reported here, the May 2019 decision from the District of Massachusetts in Nuvasive Inc. v. Day and Richard, 19-cv-10800 (D. Mass. May 29, 2019) (Nuvasive I) supported our initial reading of the MNCA.   The First Circuit’s April 8, 2020 decision in Nuvasive, Inc. v. Day, No. 19-1611 (1st Cir. April 8, 2020) (Nuvasive II), which upheld the District Court’s decision, provides further evidence that Massachusetts courts will still enforce contractual choice of law provisions when considering requests to enforce certain restrictive covenants in employment contracts.  Indeed, in Nuvasive II, the First Circuit concluded that the MNCA, by its terms, does not apply to non-solicitation agreements, and that the Massachusetts employee, Day, had not demonstrated a legal basis for the District Court to ignore the Delaware choice of law clause in his employment agreement.

Nuvasive II, like Nuvasive I, presented the question of whether an employer incorporated in Delaware could enforce a non-solicitation agreement, which was governed by Delaware law, against a former employee, who was a Massachusetts resident.  Massachusetts law, like the law of most states, generally requires courts to enforce a contractual choice of law provisions.  Nonetheless, in Nuvasive II, the former employee argued that the District Court erred in enforcing a Delaware choice of law clause because: (1) Delaware had no “substantial relationship” to the parties or the transaction; and (2) Delaware law was contrary to the fundamental policy of Massachusetts.  The First Circuit, like the District Court, rejected both arguments.

The First Circuit summarily rejected the employee’s argument that the choice of law clause was unenforceable because Delaware lacked the requisite relationship to the contract and the parties.  The Court noted that the employer was incorporated in Delaware and held that this was a sufficient basis on which to apply Delaware law to the restrictive covenant.  Indeed, the First Circuit emphasized that the Restatement of Contracts generally recognizes the validity of choice of law clauses that require application of the law of the state where one of the parties resides or maintains its principal place of business.   Thus, Nuvasive II recognizes the employer’s right to include a choice of law clause that requires application of the law of the state where it is incorporated or maintains its principal place of business.

Similarly, the First Circuit did not linger too long over the employee’s argument that the application of Delaware law would be contrary to the fundamental public policy of Massachusetts.   Citing the Massachusetts Supreme Court’s 2020 opinion in Automile Holdings, LLC v. McGovern, 136 N.E. 1207, 1271 n. 15, (Mass. 2020), the Court quickly concluded the MNCA was not applicable to the dispute at all, because it does not apply to agreements executed before October 1, 2018 and because it “does not apply to non-solicitation agreements.”   Further, the Court concluded that Massachusetts’ material change doctrine, which requires new restrictive covenants to be executed with each material change in an employment relationship, did not bar the application of Delaware law to the parties’ dispute.  In reaching this conclusion, the First Circuit defined the types of events that qualified as “material changes” as employer-initiated changes to the employment relationship, such as pay cuts, demotions, and material breaches of an employment contract by the employer.   Notably, the First Circuit rejected the contention that “an employee’s own choice to terminate” his employment by accepting a different position with his employer could be “a ‘qualifying’ change under Massachusetts’ ‘material change’ doctrine.”   Thus, as we initially predicted, the enactment of the MNCA does not bar out of state employers from enforcing reasonable restrictive covenants against Massachusetts employees.

The First Circuit expressly declined to consider whether either the MNCA or the material change doctrine embodied a “fundamental policy” of Massachusetts, because it found that the application of Delaware law did not violate either the MNCA or the material change doctrine.  Thus, out-of-state employers can expect Massachusetts employees seeking to avoid restrictive covenants governed by the laws of other states to continue to argue that the MNCA or the material change doctrine reflect fundamental policies of Massachusetts, which invalidate choice of law clauses.   Accordingly, out-of-state employers with Massachusetts employees should review the guidance in Nuvasive I and Nuvasive II and consult counsel when drafting restrictive covenants in employment contracts with Massachusetts employees.

For any attorney about to rush into New York State court to seek an injunction or temporary relief with regard to a violation of a non-compete or other restrictive covenant, or with regard to misappropriation of trade secrets, think again about venue.

By Administrative Order, dated March 22, 2020, Chief Administrative Judge Lawrence Marks has decreed that until further notice, New York State courts are accepting no filings unless the filings concern an emergency matter (as defined in the Order’s Exhibit A).  Neither restrictive covenant nor trade secret matters count as “emergencies.”

This Order thus effectively bars the initiation of non-compete or trade secret matters for its duration (and any filings in such actions that are pending) in New York state court.  If called upon to initiate action in New York on such a matter (including seeking temporary/injunctive relief), counsel must look to federal court in New York, or other potential state (or federal) venues.  If diversity jurisdiction does not exist, consider a claim under the Defend Trade Secrets Act or other federal statute to secure federal question jurisdiction.

The Administrative Order was issued in conjunction with the Executive Order issued by Governor Andrew Cuomo on March 20, 2020, which tolls deadlines until April 19, 2020.

On January 9, 2020, the Federal Trade Commission (“FTC”) held a public workshop in Washington, DC to examine whether there is a sufficient legal basis and empirical economic support to promulgate a Commission rule that would restrict the use of non-compete clauses in employment contracts.  At the conclusion of the workshop, the FTC solicited public comments from interested parties on various issues, including business justifications for non-competes, effect of non-competes on labor-market participants and efficacy of state law for addressing harms arising from non-competes.

On March 12, 2020, attorneys general from seventeen states (including California, Illinois, New York and Washington), Puerto Rico and the District of Columbia (the “AGs”) submitted extensive comments to the FTC.  The AGs take the position that non-competes harm workers by suppressing wages and degrading non-wage benefits, and harm consumers by reducing business’ access to skilled and unskilled labor and by reducing innovation. The AGs find the usual justifications for non-competes (to protect trade secrets and investments in training workers) unpersuasive, and note that non-competes–particularly for low wage workers–usually are not freely bargained for.

Declaring their support for “federal rulemaking that is consistent with our ability to pursue enforcement and legislative priorities to the benefit of workers and consumers,” the AGs also ask that the FTC work with AGs to tackle abusive use of non-competes through enforcement actions, further study, issuance of guidelines, and educational initiatives.

In the coming weeks, the FTC will be evaluating the AGs’ comments, as well as comments from many other groups and individuals, as it decides what further actions, if any, it will take with regard to non-competes.  Stay tuned.

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The Illinois legislature is once again setting its sights on covenants not to compete.  In 2016, Illinois enacted the “Illinois Freedom to Work Act,” prohibiting employers from entering into covenants not to compete with “low wage” employees.  In February 2020, Illinois legislators filed four bills targeting covenants not to compete for all Illinois employees.

SB 3021 and HB 4699 are identical in substance, and the most drastic.  These bills seek to prohibit all covenants not to compete in Illinois:  “… no employer shall enter into a covenant not to compete with any employee of the employer.”  [Emphasis added].  These bills define “employee” as “any individual permitted to work by an employer” – not just Illinois-based employees – raising extraterritoriality issues off the bat.  An identical bill prohibiting covenants not to compete for all Illinois employees was defeated in the Illinois House of Representatives in 2019, 62 to 37, with 3 “Present” votes.

HB 5454 purports to require an employer “that elects to enforce a covenant not to compete” to pay “full compensation, including all benefits” to employees during either “(1) the time specified in the covenant not to compete or (2) until the separated employee is employed full-time at a commensurate rate of pay and benefits in a field of work not subject to the covenant not to compete.”  However, this bill would simply add a new section to the Illinois Freedom to Work Act, which defines a “covenant not to compete” as “an agreement between an employer and a low-wage employee,” and declares any such agreement illegal and void.  HB 5454 thus seems fundamentally flawed on its face, because it is limited to covenants not to compete with low-wage employees, which are already illegal and void.  Setting that fixable point aside, this bill follows the lead of Massachusetts’ non-competition agreement statute in requiring garden leave-type compensation during the restricted period.

HB 3430 is the most comprehensive of the February 2020 bills.  This bill:

  • Defines “covenant not to compete” to include agreements that “impose adverse financial consequences on a former employee” for competitive activities;
  • Defines “employee” in accordance with the Illinois Wage Payment and Collection Act, which excludes independent contractors;
  • Codifies the common law requirements that an employee receive adequate consideration, and that the covenant be ancillary to a valid employment relationship;
  • Defines “consideration” as either two years of employment, or “some other fair and reasonable consideration specifically bargained for in exchange for the covenant not to compete” (a clear nod to Fifield v. Premier Dealer Services, 2013 IL App (1st) 12037, 993 N.E.2d 938);
  • Codifies the common law requirements set forth in Reliable Fire v. Arredondo, 2011 IL 111871, 965 N.E.2d 393, that the covenant (i) is not greater than required for the protection of a legitimate business interest, (ii) does not impose undue hardship on the employee, and (iii) is not injurious to the public;
  • Further codifies Reliable Fire by specifying that “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case,” including, but not limited to, “the near-permanence of customer relationships, the employee’s acquisition of confidential information through the employee’s employment, and time and place restrictions”;
  • Imposes notice requirements similar to those of the federal Older Workers Benefit Protection Act such as requiring employers to advise employees in writing to consult with an attorney before signing, and providing a copy of the convent agreement at least 10 business days before employment, or providing the employee 21 days to review the covenant before signing; and
  • Permits employees to recover costs and reasonable attorney’s fees if they prevail in an action initiated by an employer involving a covenant not to compete.

SB 3430 leaves some key questions unanswered – two questions that immediately come to mind are:  Does a “covenant not to compete” include client solicitation restrictions; and what qualifies as “some other fair and reasonable consideration”?  However, SB 3430 is the most thorough recent legislative attempt to govern covenants not to compete in Illinois.

We will keep tabs on these bills and apprise you of their progress.

A New London Connecticut Superior Court jury awarded an $839,423 verdict in November 2019, involving theft of trade secrets for a $70 million U.S. Navy underwater drone project. This case, LBI, Inc. v. Sparks, et al., KNL-cv12-6018984-S, is a classic example of the blatant theft of an employer’s confidential and proprietary information that is so easily traceable to electronic files – and the costly consequences for the defendant employer’s complicity in that trade secret misappropriation.

Plaintiff LBI, Inc., a small Groton-based research and design development company, was to design, build and test the Navy’s underwater drones, and LBI partnered with Defendant Charles River Analytics, Inc. to do the computer analytics. During the project, Defendant hired two of the Plaintiff’s employees who were subject to Plaintiff’s non-compete and non-disclosure agreements.

Plaintiff LBI proved that one of its former employees who was hired by the Defendant CRA had uploaded thousands of Plaintiff’s files to his personal Dropbox cloud-based file storage account while he worked for LBI. Soon after joining the Defendant CRA, he shared the uploaded materials with CRA, including accounting and engineering files, photographs and related designs and renderings used to fabricate and manufacture the unmanned vehicle buoys for the Navy underwater drone project.

The jury agreed with the Plaintiff LBI’s argument that the Defendant CRA began as a partner in the project, but became a competitor and committed tortious interference with the non-compete and confidentiality restrictive covenants between the Plaintiff LBI and its employees; and also, that the Defendant violated the Connecticut Unfair Trade Practices Act.

Confidential and proprietary trade secret information misappropriated by employees to their personal electronic devices and files is easily traced. Before and after hiring employees from a competitor, the hiring employer must scrutinize the source of what may be confidential and proprietary materials that the hired employee has misappropriated and is wrongfully misusing. Otherwise, the costly consequences for the malfeasant competitor-employer and former employee who steal those trade secrets are well justified.

Thomson Reuters Practical Law has released the 2019 update to “Non-Compete Laws: Connecticut,” a Practice Note co-authored with David S. Poppick and Carol J. Faherty.

See below to download it in PDF format—following is an excerpt:

OVERVIEW OF STATE NON-COMPETE LAW

1. If non-competes in your jurisdiction are governed by statute(s) or regulation(s), identify the state statute(s) or regulation(s) governing:

  • Non-competes in employment generally.
  • Non-competes in employment in specific industries or professions.

GENERAL STATUTE AND REGULATION

Connecticut has no statute or regulation that governs non-competes generally. Most non-compete agreements in Connecticut are governed by case law.

INDUSTRY- OR PROFESSION-SPECIFIC STATUTE OR REGULATION
Security Guards: Conn. Gen. Stat. Ann. § 31-50a
In the security industry, Conn. Gen. Stat. Ann. § 31-50a governs non-compete agreements.

Click here to download the PDF “Non-Compete Laws Connecticut.”

A recent decision in Edward D. Jones & Co., LP v. John Kerr (S.D.In. 19-cv-03810 Nov. 14, 2019), illustrates the unique challenges that broker-dealers may face when enforcing post-employment covenants that prohibit former registered representatives (“RRs”) from soliciting clients. Edward Jones sued Kerr, a former RR, to enforce an employment contract that required him to return confidential information upon termination and prohibited him from “directly or indirectly” soliciting any Edward Jones’ client for a period of one year.  Although Kerr did not challenge the validity of the confidentiality and non-solicitation provisions, the court denied Edward Jones’ request for a temporary restraining order (“TRO”) because it found that RRs who change firms have a duty to notify clients of material changes to their accounts, which includes changes of employment.  The Kerr opinion provides a useful primer for financial firms seeking to enforce post-employment restrictive covenants.

From 1998 – 2019, Kerr was employed by Edward Jones.  Kerr’s employment ended during an August 1, 2019 meeting at which Kerr “was permitted to resign.”  Shortly before the August 1, 2019 meeting, Kerr printed confidential client reports.  Kerr claimed he printed the reports to prepare for the meeting and destroyed them after the meeting, but Edward Jones contended that Kerr printed the reports because he knew he was about to be terminated and used the documents to solicit clients.  On August 2, 2019, Kerr began working at another firm and notified clients by telephone that he had changed firms.  Kerr admitted that he mailed informational packets concerning his new firm to clients who requested additional information.  Edward Jones also contacted clients by telephone and letter to advise them that Kerr left Edward Jones and their accounts were being reassigned.  Edward Jones alleged that Kerr asked unidentified clients to transfer their accounts to his new firm.  In contrast, Kerr claimed that he did not ask any clients to transfer assets to his new firm, and submitted affidavits from eight clients who corroborated his version of events.

As noted above, Kerr did not challenge any provision of his employment contract. Instead, he claimed that both FINRA Rule 2273 and his fiduciary duty as a certified financial planner required him to notify clients that he had changed firms. He also claimed that he did not use any Edward Jones’ documents to contact the clients. Rule 2273 does not require firms or RRs to alert clients of a change in employment, but rather requires disclosures at the time of the  first post-change communication.  Nonetheless, the court accepted Kerr’s arguments and refused to issue a TRO.  The court’s analysis turned largely on its analysis of what constitutes an impermissible ‘indirect solicitation.’

The court rejected Edward Jones’ argument that an indirect solicitation includes “any initiated, target contact” with clients and, instead, defined an indirect solicitation as contacting a customer “to maintain and establish further goodwill as a basis for future benefits.”  Kerr recognized that courts are divided over whether an announcement of a change of employment – without more – constitutes an indirect solicitation.  Some courts have found that a personal communication announcing a change of employment constitutes an indirect solicitation because the customer would assume “the broker wishes him to transfer his account.”  Other courts have refused to find such announcements are solicitations because it would be unreasonable for broker-dealers to prohibit RRs from advising clients that they have changed firms.  Kerr found that whether an announcement amounts to a solicitation “is highly contextual,” and turns on “the defendant-employee’s intent when contacting former clients.”

The court identified a series of facts and circumstances that are relevant to determining whether an announcement constitutes a solicitation.  The court emphasized that Kerr had not used misappropriated information to contact clients and that he only “inform[ed] his former clients of his new employment.”  In addition, Kerr’s announcement was consistent with Edward Jones’ guidelines for newly hired RR’s communications with clients, and thus, the court concluded that announcements are standard practice in the financial service industry. The court also noted that many of the clients were Kerr’s “family and friends before they were ever Edward Jones’ clients.”  Finally, the court credited Kerr’s claim that he contacted his former clients only to satisfy his “fiduciary duty” to inform clients concerning “material changes to their accounts, which includes a change of financial advisor.”   The court therefore concluded that the announcement was not a solicitation.

The court then concluded that Edward Jones would not suffer irreparable harm without an injunction, and observed it was not necessary to address the balancing of harms before denying injunctive relief.  Nonetheless, the court observed that there is “judicial reluctance to restrict financial communications with their clients” because of the relationship of personal trust between clients and their financial advisors.  Although the court recognized that contractual non-solicitation provisions are enforceable against former RRs, it suggested that courts are reluctant to enjoin communications that merely advise clients that RRs have changed firms.

The Kerr decision does not address a firm’s ability to seek monetary damages and clearly reflects the facts of the case.  However, its conclusion — that RRs are obligated to inform clients of a change of employment – indicates that firms must prove actual solicitations or other misconduct as a prerequisite to obtaining injunctive relief.  In light of the upcoming June 2020 effective date of Regulation BI, which, as reported here, obligates firms and RRs to ‘act in the best interest of customers,’ courts may find Kerr persuasive when evaluating requests to enforce non-solicitation agreements.