The 2019 legal landscape of employee mobility continues to evolve, at times drastically. Courts and legislatures are giving increased scrutiny to employers’ claims to protect the confidentiality of their trade secrets and attempts to enforce their employees’ restrictive covenants, including non-competition and non-solicitation agreements. It can be hard for employers to prevent their confidential information and client goodwill from following certain departing employees.

With greater knowledge of the latest legal theories, decisions, statutes, and other developments in this area, employers can better protect and defend their interests—even preemptively—including in the ways they draft their employee agreements, design their compensation structures, and consider whether and when to engage in litigation.

This issue of Take 5 aims to provide a few tools for deciphering and navigating this changing employee mobility landscape.

Drafting Employment Agreements to Comply with New State Laws and Pending Legislation Restricting Enforceability of Non-Competes

David J. Clark

In the last year, Maryland, Massachusetts, Oregon, and Washington State passed game-changing laws that restrict the enforceability of provisions between an employer and an employee that limit the employee’s post-termination ability to work in competition with the employer. Numerous other state legislatures, including Missouri’s, New Hampshire’s, and New Jersey’s, recently have considered similar legislation.
Employers can get ahead of this trend by implementing the following measures when preparing and presenting non-compete agreements to new and existing employees:

  • Do not ask low-wage or junior-level employees who do not have important client relationships or access to company trade secrets to sign non-competes.
  • When presenting a non-compete agreement (and it must be in writing), provide the individual with at least 10 days’ notice and an opportunity to review the agreement with counsel.
  • Provide compensation to the employee during any non-compete period. For a non-compete presented to an existing employee, offer more consideration than mere continued employment.
  • Limit the duration of any non-compete to one year at the most, and preferably less.
  • If including a choice of law or forum selection clause, specify the state where the employee works or resides.
  • Keep the scope of the non-compete restriction reasonable by limiting it to the specific industry, job duties, and/or geographic area in which the employee worked for the employer.
  • Advise departing employees of their ongoing non-compete obligations.
    While no guarantee of enforcement, adherence to these measures will increase the likelihood that a non-compete will be upheld if challenged in court or arbitration.

Red Flags When Recruiting a Competitor’s Employee: Spotting Issues Before a Demand Letter

Michael S. Ferrell

Winning in restrictive covenant litigation is one thing, but most employers would prefer to avoid it if possible, or at least make decisions with “eyes wide open” as to the litigation risks of a potential hire. Below are some “red flags” that may motivate a dispute.

The Former Employer’s Sensitivities, Generally and Specific to the Candidate:

  • What are the resources and litigation appetite of the former employer? Non-compete litigation is expensive and comes with significant risk. Does the former employer have a history of filing such litigation? Is the former employer aggressive in enforcing restrictive covenants, and under what circumstances?
  • How sensitive is the former employer likely to be about the loss of the candidate? How senior or junior is the candidate? Is he/she a practice leader or individual contributor? Does the candidate hold key client relationships, trade secrets, or other intellectual property (“IP”) knowledge that may motivate litigation?
  • Did the candidate take any IP or other property of the former employer? A belief the candidate stole IP casts the candidate as a bad actor and opens up statutory claims for theft of trade secrets. The new employer should expressly remind candidates to take and bring nothing from their former employer.
  • How vulnerable are the restrictions in the candidate’s agreement if an enforcement action is filed? The restrictions may be overly broad and out of step with recent case law in the applicable jurisdiction. The greater the vulnerability, the less likely the former employer will bring litigation.

The Former Employer’s Sensitivities to the Candidate’s New Employment:

  • Is the new employer a direct or indirect competitor of the former employer? The more direct the competition, the more likely the former employer is to be motivated to take action. It may be possible to avoid a dispute by providing assurances the candidate will not, for the restricted period, solicit the customers or employees of the former employer.
  • Is the candidate being hired in substantially the same role as at the former employer? Hiring into a different role, at least for the duration of the restriction, may avoid a dispute. Former employers have limited ability to monitor the candidate’s activities, but a representation may be enough.
  • Is the candidate being hired to work/compete in the same geographic area or market space? A candidate moving to a competitor in the same city or market may lead to a dispute. If this can be avoided for the duration of a restriction, there is a greater likelihood of resolution without litigation.

The Parties’ History:

  • Is the former employer’s perception likely to be that the new employer is targeting its employees? Is the candidate the first or just the most recent individual hired from the former employer? Did the new employer recruit the candidate, or did the candidate make the first contact about employment? One or two hires may go unchallenged, but additional hires, particularly over a short period, increase the risk of litigation.
  • Has the former employer previously hired employees of the new employer, and how did the new employer react? If the new employer’s previous reaction was to file suit to prevent an employee from working for the former employer, one shouldn’t expect the former employer to turn the other cheek when the situation is reversed.
  • Are there other indications of bad blood between the parties? Have there been other disputes between the new employer and former employer that led to litigation? Has the candidate or new employer disparaged the former employer in the marketplace? The more bad blood, the greater the risk of litigation.

ERISA Nonqualified Deferred Compensation Plans, Restrictive Covenants, and ERISA Preemption

Gretchen Harders, Cassandra Labbees, and Daniel J. Green

Although typically the province of state law, Employee Retirement Income Security Act (“ERISA”) preemption may override state law limitations when forfeiture-for-competition covenants come within the purview of an ERISA benefit plan. Valid forfeiture provisions in ERISA plans, therefore, may be enforced even in states where forfeiture-for-competition clauses are not typically enforceable.

The most suitable type of ERISA plan for a forfeiture-for-competition clause is a type of nonqualified deferred compensation plan colloquially known as a “Top Hat Plan.” Top Hat Plans are a category of unfunded ERISA plans maintained “primarily for the purpose of providing compensation to a select group of management or highly compensated employees.”[1] In general, “ERISA preempts state law regarding forfeiture of retirement benefits.”[2] ERISA also has been found to preempt state laws limiting the enforcement of non-competition clauses in Top Hat Plans.[3] This suggests that employers with Top Hat Plans including forfeiture-for-competition clauses could use those forfeiture clauses to enforce restrictive covenants that would otherwise violate state law if provided under an agreement not subject to ERISA.

Top Hat Plans with embedded forfeiture-for-competition clauses also could afford employers advantages in adjudicating whether departing employees violated their non-competition obligations. If Top Hat Plan documents clearly state that the plan administrator maintains discretionary authority to determine benefits eligibility and to construe the terms of the Top Hat Plan, many courts will afford the plan administrator’s determination a deferential standard of review.[4]
Employers sponsoring a Top Hat Plan with embedded forfeiture-for-competition clauses should proceed with their eyes open concerning what this provision can and cannot accomplish. A restrictive covenant in a Top Hat Plan does not directly prohibit the behavior; rather, it is only enforceable to the extent compensation is forfeited as a result of the behavior. Further, the purpose of a traditional Top Hat Plan is to provide a stream of retirement income to key executives and not necessarily as a tool to enforce restrictive covenants, so any restrictive covenant provisions should be considered in the context of the purpose of the Top Hat Plan, the plan design, and the overall compensatory policies of the employer.

A Judge’s Tips for Keeping Trade Secrets “Secret”

Peter A. Steinmeyer and Erica McKinney

Just because information is sufficiently sensitive and valuable that it can qualify as a “trade secret” does not mean that it will qualify unless the owner of the information takes adequate steps to protect its secrecy.

In a recent decision, Judge John J. Tharp, Jr., of the U.S. District Court for the Northern District of Illinois explained that “there are two basic elements to the analysis” of whether information qualifies as a “trade secret”: (1) the information “must have been sufficiently secret to impart economic value because of its relative secrecy” and (2) the owner “must have made reasonable efforts to maintain the secrecy of the information” (internal quotation marks omitted).[5]

According to Judge Tharp, some of those “reasonable efforts” that a company can take to maintain the secrecy of its information include:

  • using non-disclosure and confidentiality agreements with employees;
  • enacting a policy regarding the confidentiality of business information that is more detailed than a mere “vague, generalized admonition about not discussing [company] business outside of work”;
  • training “employees as to their obligation to keep certain categories of information confidential”;
  • asking departing employees whether they possess any confidential company information, and, if they do, instructing them to return or delete it;
  • adequately training IT personnel about data security practices;
  • restricting access to sensitive information on a need-to-know basis; and
  • as appropriate, labelling documents “proprietary” or “confidential.”

As Judge Tharp made clear, companies that fail to institute reasonable measures to protect sensitive information do so at their own peril.

Can Plaintiffs Use an Antitrust Defense as a Weapon to Challenge Non-Competes?

J. William Cook

On March 15, 2019, four radiation oncologists alleged that their employer, 21st Century Oncology LLC, and its related entities have maintained an illegal monopoly over the provision of radiation oncology services in three counties in southwest Florida in violation of federal antitrust laws. Dosoretz v. 21st Century Oncology Holdings, Inc., 2:19-cv-00162-UA-UAM, filed in the U.S. District Court for the Middle District of Florida, alleges that the anti-competitive conduct includes requiring the oncologists—the “only radiation oncologists in these counties”—to sign “onerous” non-compete agreements that stifled competition in the counties and “exclusive long-term contracts with key hospitals,” which allegedly created a monopoly on radiation oncology services for patients at those hospitals. The complaint seeks a declaration that (1) the defendants violated the Sherman Act through their anticompetitive practices and (2) the doctors’ non-compete agreements are unenforceable. Alternatively, the doctors seek to restrict the temporal and geographic scope of the overbroad non-competes. The defendants’ motion to dismiss is pending.
It is not easy to prevail on a monopolization claim premised on non-compete restrictions in employment agreements. As explained in Cole v. Champion Enters., 496 F. Supp. 2d 613, 635 (M.D.N.C. 2007), although “[t]here can be little doubt that the Sherman Act applies to [non-competes],” there is little “precedent”; “[o]ne explanation … may be the difficulty involved in proving that a post-employment noncompetition agreement violates the Sherman Act. Such agreements are not per se violations of the Sherman Act but must be analyzed under the rule of reason. To establish a violation under the rule of reason, one must prove that the agreement has an adverse effect on competition in the relevant market.”
The Dosoretz case is worth watching. If it progresses, it may provide valuable insight for non-competition litigants, whether they are asserting or fighting an antitrust claim premised on non-compete agreements.

Read the Take 5 on our website.

[1] 29 U.S.C. § 1051(2).
[2] Thomas v. Bostwick, No. 13-cv-02544-JCS, 2014 U.S. Dist. LEXIS 123524 (N.D. Cal. Sep. 3, 2014).
[3] Conklin v. Brookfield Homes Holdings, Inc., No. SACV 08-00452-CJC(PJWx), 2009 U.S. Dist. LEXIS 134870 at *10 (C.D. Cal. Oct. 6, 2009) (enforcing forfeiture-for-competition clause in Top Hat Plan against California employee); Clark v. Lauren Young Tire Ctr. Profit Sharing Tr., 816 F.2d 480 (9th Cir. 1987)(“ERISA preempts state law with respect to non-competition forfeiture clauses.”); Lojek v. Thomas, 716 F.2d 675 (9th Cir. 1983) (“The district court correctly decided that ERISA has preempted Idaho law and that federal law governs the validity of the plan.”); Elbling v. Crawford & Co., No. 16cv2951-L(KSC), 2018 U.S. Dist. LEXIS 53521 (S.D. Cal. Mar. 28, 2018) (state law denial of benefits claims preempted by ERISA).
[4] Elbling, at *8 (“[T]he Ninth Circuit reviews administrators’ decisions regarding top hat plans for abuse of discretion when the plan gives the plan administrator discretionary authority to resolve claims.”); Wall v. Alcon Labs. Inc., 551 F. App’x 794, 799 (5th Cir. 2014) (plan administrator’s determination that plaintiff “violated the non-compete clause” in Top Hat Plan is subject to “arbitrary and capricious” standard of review).
[5] Abrasic 90 Inc. v. Weldcote Metals, Inc., No. 1:18-cv-05376 (N.D. Ill. Mar. 3, 2019) at 11.

Maryland recently joined the ranks of states with laws limiting the enforcement of non-compete agreements against low wage workers.  Maryland’s recently enacted law (SB 328) bars employers from enforcing non-compete agreements against workers earning less than or equal to $15 per hour or $31,200 per annum.

In a nod to employers, the statute is carefully worded to protect low wage workers exclusively and “may not be construed to affect a determination by a court in an action involving” an employee whose earnings exceed both $15 per hour and $31,200 per annum.  The statute only bars the enforcement of non-compete agreements (as opposed to other types of restrictive covenants, such as customer or co-worker non-solicitation agreements) and explicitly reserves employers’ right to enforce contracts prohibiting “the taking or use of a client list or other proprietary client-related information.”

The new law takes effect on October 1, 2019, invaliding past contracts as applicable and prohibiting any future agreements.  In the meantime, Maryland employers should consider revising their non-compete agreements to conform to the new law.

This post was written with assistance from Jenna Russell, a 2019 Summer Associate at Epstein Becker Green.

In its new podcast series, Employment Law This Week has released an extended Monthly Rundown, discussing some of the most important developments for employers in June 2019.

This episode includes:

  • Worker Classification in the Gig Economy
  • NLRB Announces Rulemaking Agenda
  • National Backlash Builds Against Non-Compete Agreements
  • Tip of the Week: Compliance with New Jersey’s Equal Pay Act

Stay tuned: Listen to the latest episode on our website or on your preferred platform – iTunes, Google Play, Soundcloud, or Spotify – be sure to subscribe!

When Massachusetts enacted the Massachusetts Noncompetition Agreement Act (“MNCA”) in mid-2018, many suggested then and thereafter that such statutes reflected an anti-employer tilt in public policy. But we advised at that time that the MNCA in fact appeared to present manageable options for sophisticated employers advised by knowledgeable counsel.   A recent federal court decision from the District of Massachusetts in Nuvasive Inc. v. Day and Richard, 19-cv-10800 (D. Mass. May 29, 2019), supports our earlier read, and belies the notion that Massachusetts courts see the Commonwealth’s policy requiring application of its own law to pre-existing non-competes.  So despite the fear that the statute would eliminate multi-state employers’ ability to rely on more favorable non-Massachusetts law when enforcing restrictive covenants, the Nuvasive court’s result and analysis gives employers hope that such fears were overblown.

In Nuvasive, the court enforced a contractual choice of law clause requiring the application of Delaware law.  In reaching this conclusion, the court noted that Massachusetts law generally gives effect to contractual choice of law clauses unless “the chosen state has no substantial relationship” with the parties or transaction or the application of the chosen law is contrary to the “fundamental public policy of a state” with a materially greater interest.  The court found that Delaware had a substantial relationship with the parties because Nuvasive is incorporated in Delaware.  The court also found that the application of Delaware law would not be contrary to any fundamental public policy of Massachusetts, notwithstanding the changes enacted last year and some existing elements of Massachusetts common law.

In reaching this conclusion, the court, as noted, did not buy the hype.  For instance, the court rejected the argument that the material change doctrine, which requires new restrictive covenants to be executed with each material change in an employment relationship, constituted a fundamental public policy of the Commonwealth.  In addition, the court concluded that applying Delaware law would not violate the MNCA. Although the contract at issue was executed prior to the October 1, 2018 effective date of the MNCA, and hence, not subject to the MNCA, the court assumed that the MNCA reflected the fundamental policy of the Commonwealth.  The court nonetheless found that applying Delaware law would not violate the MNCA. The court emphasized that Delaware law, like the MNCA, required that any restrictive covenant contain reasonable temporal and geographic restrictions, reasonable restrictions on “the scope of prohibited activities” and be “no broader than necessary” to protect trade secrets, confidential information and goodwill.  The court also noted that the agreement at issue was in writing, stated that the employee could consult counsel, and contained a restrictive period that lasted only twelve months after the termination of employment and was no broader than necessary to protect Nuvasive’s legitimate business interests.  Although the agreement did not contain a garden-leave provision obligating the employer to pay the employee during the restricted period, the court found that the agreement was supported by “mutually agreed upon consideration.”  Significantly, the court did not describe the “mutually agreed upon consideration” that supported the agreement, and the agreement itself referenced only compensation and access to Nuvasive’s good will and proprietary information.

So, in the end, despite a new statute that seemed to change significantly the lay of land in the non-compete area, the court did not view it as changing the public policy of Massachusetts.  Public policy in Massachusetts, at least according to the Nuvasive court, does not require garden leave, provided there is some indicia of consideration, and in fact does not even require application of the law of the Commonwealth, provided that the law chosen had some nexus to the parties and is not glaringly inconsistent with the MNCA. Thus, despite the enactment of the MNCA, the court followed standard choice of law rules and applied Delaware law, just as it would have done before last summer.  It is not clear if the court would have applied Massachusetts law, rather than Delaware law, if the contract had been executed after October 1, 2018, or that the application of Massachusetts law would have led to a different result.   So, the more things change (in the statute), the more they stay the same (in the enforcement of pre-existing contracts and application of choice of law rules).

Pursuant to a recently passed Oregon state law (HB 2992), noncompete agreements entered into on or after January 1, 2020 will only be enforceable against Oregon employees if the employer provides the departing employee with a signed copy of the agreement within 30 days after the employee’s date of termination.  Though at first blush, this law merely codifies the best practice of reminding departing employees of their continuing obligations to their former employer, it contains a few nuances Oregon employers should keep in mind.

The law requires employers to provide departing employees with a signed copy of their noncompete agreement within 30 days after their termination date.  Under a plain text reading of the statute, providing departing employees with a copy of their noncompete agreements on their last day of employment, for example during their exit interview, will not satisfy the statute.  Rather, employers should transmit copies of any noncompete agreements to former employees after their employment has terminated.

Although this requirement only applies to noncompete agreements (as opposed to non-solicitation agreements or garden leave clauses), as a best practice, employers should consider reminding departing employees of all their post-employment obligations.

Oregon employers have some lead-time to develop new procedures to accommodate this new requirement.  The law applies to noncompete agreements entered into on or after January 1, 2020, so preexisting agreements will continue to be enforceable even if the employer neglects to provide the required notice.

Webinar – Wednesday, June 26, 2019, 12:00 p.m. – 1:00 p.m. PDT

California, the Golden State, is a special place to live and work. However, if you are an employer in California, you have most likely heard warnings of what you cannot do in terms of protecting your workforce and trade secrets and preventing unfair competition. While the rules of the road are different in California, employers are not without tools to protect their resources. And those tools are the focus of this program: what you can do to protect your workforce and trade secrets in California.

Join our colleagues Steven R. BlackburnJames A. Goodman, and Peter A. Steinmeyer as they cover the topics of:

  • The art of actively (and actually) protecting your trade secrets
  • How, if at all, does the Defend Trade Secrets Act of 2016 affect trade secret litigation and employee mobility in California?
  • The latest (in terms of technology) on protecting your electronically stored information from being exported from the work environment.
  • The importance of good employee exit procedures
  • Best practices in monitoring competitive damages after an employee departs
  • “Cease and desist” letters in California
  • What is the status of various legal work-arounds that employers have tried in California over the years? Garden leaves, contingent compensation, choice-of-law provisions–are any of them viable?
  • Be ready to go to court—or, more accurately, “how to be ready before you go to court”
  • The latest on restricting former employees from soliciting their former co-workers
  • The ever-present problem: how do you prove damages?
  • Reconciling mandatory arbitration with injunctive relief
  • The surprise new issue: broad nondisclosure agreements being attacked as restraints of trade or violations of various California Labor Code provisions or the National Labor Relations Act

Click here to RSVP for this webinar.

Employers sometimes ask whether it matters if they are inconsistent in their enforcement of non-competes.  Typically, the issue is analyzed in terms of whether inconsistent enforcement undercuts the legitimate business interest justifying the restriction.  However, in a pending lawsuit, Miller v. Canadian National Railway Co., the issue is being raised in a different context: whether alleged inconsistent enforcement was racially motivated.  Specifically, the plaintiff in that case alleges that “[b]y enforcing the non-compete against Miller and not against similarly situated white employees, Defendants are interfering with Miller’s future employment relationships because of his race.”

Enforcement of non-competes rarely comes up in the context of a discrimination claim, but as illustrated by this case, this is another factor of which employers should be aware when considering whether to enforce a restrictive covenant.

Non-competes are going to be harder to enforce in Washington State.  On May 8, 2019, Governor Jay Inslee signed the “Act Relating to Restraints, Including Noncompetition Covenants, on Persons Engaging in Lawful Professions, Trades or Businesses,” which was passed by both houses of the state legislature in April.

The new law will become effective January 1, 2020, and will render unenforceable non-competition provisions signed by employees earning less than $100,000 and independent contractors earning less than $250,000 annually.  Other important provisions of the law are as follows:

  • Any non-competes exceeding 18 months will be considered unreasonable and unenforceable.
  • The law will apply to any claims asserted on or after January 1, 2020 regarding non-competition agreements, even if the agreement was signed prior to that date.
  • Only non-competition provisions are targeted by the law, not provisions regarding solicitation of clients or co-workers, confidentiality or non-disclosure of trade secrets agreements, or covenants entered in connection with the sale of business goodwill or an ownership interest.
  • Employers must disclose the terms of a non-compete to an employee or contractor prior to acceptance of employment.
  • Employers asking existing employees to sign new non-competes must provide independent consideration, e., some additional pay or benefit to which the employees are not already entitled.
  • Employers wishing to enforce non-competes against laid-off employees must pay full base salary throughout the non-compete period (minus compensation earned by the employee through other employment).
  • Employers seeking to enforce non-compliant non-competes can be sued by the employee or the Attorney General, and be ordered to pay the greater of actual damages or $5,000, plus attorneys’ fees and costs.
  • Out-of-state forum selection clause will not be enforced against Washington-based employees or contractors, no matter where the employer is based.

These are big changes to current Washington law governing non-competes.  Businesses with employees or independent contractors in Washington should evaluate all non-competition agreements they may have with such individuals, and take steps to be in compliance with the law by the end of this year.

Tuesday, May 7, 2019
Downtown Chicago Dinner Program

Wednesday, May 8, 2019
Repeat Suburban Lunch Program

Join our colleagues Lauri Rasnick, Kevin Ryan, and Peter Steinmeyer for an interactive panel discussion which will provide insights into recent developments and expected trends in the evolving legal landscape of trade secret and non-competition law. This program will also discuss unique issues and developments in the health care and financial services industry. Our colleagues will also be joined by Thomas J. Shanahan, Associate General Counsel at Option Care.

Issues arising from employees and information moving from one employer to another continue to proliferate and provide fertile ground for litigation. Many businesses increasingly feel that their trade secrets or client relationships are under attack by competitors—and even, potentially, by their own employees. Individual workers changing jobs may try to leverage their former employer’s proprietary information or relationships to improve their new employment prospects, or may simply be seeking to pursue their livelihood.

How can you put yourself in the best position to succeed in a constantly developing legal landscape?

Whether you are an employer drafting agreements and policies or in litigation seeking to enforce or avoid them, you will want to know about recent developments and what to expect in this area.

During this program, the panel will discuss:

  • Legal trends in the enforceability of non-competes
  • New and pending state and federal legislation, including the Massachusetts Noncompetition Agreement Act
  • Recent judicial decisions regarding restrictive covenants, including an important California case concerning provisions barring solicitation of employees
  • New cases and statutes regarding protection of trade secrets
  • Continuing governmental scrutiny of “no poach” agreements and restrictions on low wage workers

To register, click here.

ACC Chicago is an Approved Illinois CLE Provider. 1 General Credit Hour (pending) for this program. Participants seeking MCLE credit need to sign in and provide their Illinois Bar number

Our colleagues at Epstein Becker Green have a post on the Financial Services Employment Law blog that will be of interest to our readers: “FINRA Issues New Guidance to Member Firms Regarding Customer Communications When Registered Representatives Depart.”

Following is an excerpt:

On April 5, 2019, FINRA published Regulatory Notice 19-10 (the “Notice”) addressing the responsibilities of member firms when communicating with customers about departing registered representatives.  As the Notice indicates, in the event a registered representative leaves a member firm, FINRA aims to avoid any disruption in the service of customer accounts and to ensure that customers can make a “timely and informed choice” about where to maintain their assets. The Notice contains two key points about what is expected of member firms in terms of customer communications when a registered representative departs. …

Read the full post here.