We’d like to share an article we wrote recently in Law360: “Illinois Noncompete Reform Balances Employee and Biz Interests.”

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

Over Memorial Day weekend, the Illinois Legislature accomplished something truly remarkable: a comprehensive reform of noncompete and nonsolicit law that was passed unanimously by the Illinois Senate and House of Representatives.

The reform bill is not a complete ban, as some competing bills and employee advocates originally sought. And the bill is certainly not pro-enforcement, as many employers would prefer. Instead, it is that increasingly rare political creature: a compromise.

Why Is the Illinois Compromise Significant?

Attitudes toward restrictive covenants do not fit neatly into a red or a blue political litmus test, as there are competing interests recognized by persons on both sides of the political aisle. On the one hand, post-employment restrictive covenants are one of the most effective tools to protect confidential information, customer relationships, and a business’s investment in itself and its employees.

Businesses in both red and blue states see the same color when it comes to protecting these interests: green. On the other hand, post-employment restrictive covenants impede employee mobility, and thereby clash with fundamental notions of individual liberty. …

Download the full article in PDF format: “Illinois Noncompete Reform Balances Employee and Biz Interests.”

Oregon’s Senate Bill 169, signed May 21, 2021 strengthens Oregon’s existing restrictions on noncompete agreements.  Unlike Oregon’s 2019 law which imposed new notice requirements on employers seeking to enter into enforceable noncompetes, Senate Bill 169’s changes are more subtle though just as impactful.

Previously, noncompete agreements which failed to comply with Oregon’s statutory requirements were “voidable.”  Senate Bill 169 declares noncompliant noncompetes entered into after January 1, 2022 “void” ab initio.  This seemingly minor change may carry significant legal consequence if it ends up reducing the circumstances in which a former employer can sue for tortious interference.

Other changes in Senate Bill 169 include a reduction in the maximum enforceable length of a noncompete from 18 months to 12 months and a new formula for determining the minimum compensation an employee must be paid to be subject to a noncompete.  Previously, Oregon employers could only bind employees earning at least the median family income for a four-person family as determined by the most recent available census information to be bound by a noncompete.  Under Senate Bill 169, employees must make at least $100,533.00 in 2021 dollars adjusted for inflation to be subject to a noncompete.

Significantly, SB 169 maintains Oregon’s “garden leave” option to enforce otherwise noncompliant noncompetes.  This permits employers to enforce otherwise unenforceable noncompetes for up to a year provided  the agreement provides in writing that the former employee will be paid the greater of at least 50% of their gross annual base salary and commissions at the time of termination or 50% of $100,533.00 in 2021 dollars adjusted for inflation.

Senate Bill 169 applies to agreements entered into on or after January 1, 2022.  Employers should take steps to ensure that their restrictive covenants for Oregon employees comply with Senate Bill 169 in advance of this effective date.

As reported here and here, in December 2019 and January 2020, the United States Department of Justice brought its first criminal charges against employers who entered into “naked” wage fixing agreements and no-poach (e.g., non-solicitation and/or non-hire)  agreements with competitors. According to DOJ’s 2016 Antitrust Guidance for HR Professionals, such agreements are “naked,” and, therefore, illegal per se, because they are “separate from or not reasonably related to a larger legitimate collaboration between competitors.”  Although DOJ recognized that such agreements may not be illegal per se when made in furtherance of legitimate joint ventures or business, it provided scant guidance on what it would deem to be a legitimate joint venture or collaboration.  The Pennsylvania Supreme Court recently addressed the issue in Pittsburgh Logistics Systems v. Beemac Trucking, 2021 WL 1676399, at *1 (Pa. Apr. 29, 2021).  Relying in part on DOJ’s Guidance, the Court found that the no-poach agreement was unenforceable because it was overbroad and contrary to public policy.

Plaintiff, a third party logistics provider, sought to enforce a no-poach agreement that prohibited defendant, who supplied trucking services to plaintiff, from hiring or soliciting any of plaintiff’s employees.  The Supreme Court found that the no-poach agreement was ancillary to the services agreement between plaintiff and defendant.  Therefore, it reviewed the agreement  under the “rule of reason,” test included in the Restatement (Second) of Contracts, which requires that the restraint be no greater than necessary to protect the plaintiff’s legitimate business interest and that the plaintiff’s need not be outweighed by the hardship to the defendant and the likely injury to the public.  The Supreme Court found that this test was consistent with DOJ’s Guidance, but concluded that the no-poach restraint was unreasonable.

Although the Supreme Court acknowledged that the plaintiff “had a legitimate business interest in preventing its business partners from poaching” its employees, it found that the no-poach agreement was overbroad because it prohibited defendant from hiring plaintiff’s employees for two years after the collaboration ended, regardless of whether they had ever worked with defendant.  The Court also found that the agreement was likely to harm the public by: (1) impairing the mobility of plaintiff’s employees, who were not parties to the contract; (2) depriving several named individual defendants of their livelihood; and (3) undermining overall competition in the labor market for the shipping and logistics industry, which would suppress wages and harm the publicly generally.  Along the way, the Court recognized that DOJ has “taken a strong stand against no-hire restrictions,” and that fourteen states had recently reached a settlement agreement requiring four national franchisors to cease using no-poach agreements restricting employee mobility.

The Supreme Court’s decision reflects increasing skepticism toward no-poach agreements.  Indeed, as reported here, President Biden has indicated that he favors eliminating non-compete and no-poach agreements that suppress wages, and state legislatures and law enforcement authorities seem to be ready to regulate this area.  As reported here,  New York is considering legislation that would prohibit no-poach clauses in franchise agreements and would create a private right of action for any employee subject to such an agreement, along with potential punitive damages and attorney’s fees.  Similarly, in 2019, Maine enacted a law prohibiting no-poach agreements between employers.

Notwithstanding these developments, employers who are involved in legitimate joint ventures can still take steps to protect their legitimate interest in ensuring effective business collaborations while protecting their trade secrets, good will and work force.   The Pittsburgh Logistics case provides important guideposts for business involved in legitimate joint ventures.  First, like non-solicitation clauses in agreements with employees, the restraints in no-poach agreements between partners should be no greater than necessary.  Thus, no-poach agreements between business partners should either end when the joint venture or collaboration ends or reflect the geographic and temporal limits recognized as enforceable in employment agreements in the relevant jurisdiction.  Second, businesses should consider requiring employees to agree to refrain from seeking positions with any business partner for whom they have worked while they are employed or for a reasonable period after their employment ends.  Indeed, the Pennsylvania Supreme Court found it significant that the employees were not aware of the no-poach agreement between the business partners and were not parties to the agreement, thus raising the question if the outcome would have been different had the plaintiff included a similar restriction in its employment agreements.

As shown by the DOJ’s recent criminal enforcement actions and the Pittsburgh Logistics case, the law in this area is rapidly developing.  However, each situation is unique and there is no one-size-fits-all approach to navigating this thicket.  Employers who wish to protect their work forces to ensure effective collaborations should review both their agreements with their business partners and their employees to ensure that their agreements can withstand scrutiny.

As readers of this blog know, no-poach and wage-fixing agreements are a current hot topic for both civil and criminal enforcement by the Antitrust Division of the Department of Justice.

Our colleague, Stuart M. Gerson has authored a helpful summary of recent history and what’s at stake regarding this topic, in an article published in Bloomberg Law: “No-Poaching Agreements, Wage-Fixing & Antitrust Prosecution.”

The following is an excerpt:

Especially in difficult economic times, companies look for stability and predictability. Hence, while intent upon avoiding litigation charging wage fixing or its close cousin, no-poach agreements, experience suggests that there are companies that might be considering various ways to exchange information related to employment that can be used for “bench marking.”

Such efforts are intended to be lawful means to create and share data that are updated from time to time and that reflect prevailing levels and standards by which companies might be able to intuit what their competitors are doing and therefore can establish market rates and practices which presumably the individual members of the group might adopt.

Although such companies might be concerned only about information exchanges, and not agreements to fix wages or avoid poaching of competitors’ employees, the potential enforcement stance of the Department of Justice simply does not allow for this simplification.

Click here to download the full article in PDF format.

New Jersey may be poised to become the latest state to adopt strict procedural and substantive requirements on post-employment non-compete agreements. Assembly Bill No. 1650, if passed, would substantially overhaul New Jersey’s laws regarding post-employment non-compete agreements by, among other things, limiting the types of employees against whom a non-compete agreement is enforceable, as well as limiting the time, scope and geographic region of a non-compete agreement. Assembly Bill No. 1650 still permits post-employment non-compete agreements so long as the agreements are “not broader than necessary to protect the legitimate business interests of the employer.” The bill suggests that employers should first determine if an alternative agreement, such as a non-solicitation agreement with respect to hiring the employer’s employees or transacting business with the employer’s customers, clients, referral sources or vendors, would instead be sufficient to protect the employer’s legitimate business interests.

If passed in its current form, the bill would exclude ten categories of individuals from being subject to non-compete agreements, including employees classified as nonexempt under the Fair Labor Standards Act of 1938, employees that have been terminated without a determination of misconduct or laid off by action of the employer, and employees whose period of service to an employer is less than one year. Notably, the bill limits the length of non-compete agreements to a one-year period and requires that geographic restrictions be “reasonable” and “limited to the geographic areas in which the employee provided services or had a material presence or influence during the two years preceding the date of termination of employment, and shall not prohibit an employee from seeking employment in other states.” The bill also requires that all non-compete agreements have a garden leave period during which employers must continue to pay an employee their full salary and make benefit contributions on the employee’s behalf during the period of time covered by the non-compete agreement.

Additionally, the bill requires specific notices be provided to prospective and current employees within specified time frames prior to entering into a non-compete agreement. Employers would also be required to notify employees in writing no later than 10 days after the termination of the employment relationship of its intent to enforce the agreement. The failure to provide this notice would automatically void the agreement. However, this notice provision would not apply if the employee has been terminated for misconduct.

If the bill passes in its current form, employers would not be able to use a choice of law provision to avoid the bill’s requirements. Choice of law provisions would be forbidden if the employee is either a resident of or employed in New Jersey for at least thirty days immediately preceding their termination of employment and at the time their employment is terminated. Employers would also be required to post a copy of the summary of the bill’s requirements in a “prominent place in the work area.”

The bill also provides an employee subject to a non-compete agreement the right to commence a civil action against the employer or another person for violating the bill within two years of the later of: (1) when the prohibited agreement was signed; (2) when the employee learns of the prohibited agreement; (3) when the employment relationship is terminated; or (4) when the employer takes steps to enforce the agreement. Courts would have jurisdiction to void the agreement and award any additional appropriate relief.

On February 24, 2021, A1650 received enough votes to clear the Assembly Labor Committee. The bill is currently awaiting a vote before the General Assembly. If enacted, the legislation would take effect immediately, but would not apply retroactively to any agreement in effect on or before the date of enactment.

We’re pleased to present the 2021 update to “Hiring from a Competitor: Practical Tips to Minimize Litigation Risk,” published by Thomson Reuters Practical Law.

Following is an excerpt – see below to download the full version:

A Practice Note describing the steps an employer can take to minimize litigation risk when hiring from a competitor. This Note discusses potential statutory and common law claims when hiring from a competitor, the need to identify any existing contractual restrictions a potential new hire may have, how to avoid potential issues during the recruitment process, ensuring the new hire is a “good leaver” during the resignation process, responding to cease and desist letters, and potential pre-litigation settlement concepts. The Note is jurisdiction neutral.

Click here to download the full Practice Note in PDF format.

Last week, the New York State Senate advanced two bills seeking to ban both “no-poach” clauses in franchise agreements and “no-rehire” clauses, which are commonly used in settlement agreements.

The first of these bills, known as the End Employer Collusion Act (Bill S562), prohibits no-poach agreements between franchisors and franchisees.  Such agreements restrict franchisees from soliciting or hiring current or former employees of the franchisor or other franchisees.  The End Employer Collusion Act would also provide a private right of action for any person denied employment on account of a no–poach agreement, and would allow for the recovery of actual and punitive damages, as well as costs and attorneys’ fees.  The New York legislature is not the first to target no-poach clauses in franchise agreements; Washington passed legislation banning such clauses nearly two years ago.  In addition, prior to taking office, in his Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions, President Biden indicated that he would like to see federal legislation in this area, and that he intends to work with Congress to “outright ban all no-poaching agreements.”

The second bill, S766, would prohibit employers from inserting no-rehire clauses in settlement agreements with employees or independent contractors.  Such clauses bar employees from applying for or accepting future employment with the employer, or its related entities, and were originally designed to protect an employer from retaliation claims in the event that the employee reapplied for his or her prior job and was not hired.  The proposed legislation would void settlement agreements containing no-rehire clauses.  However, the employer’s obligations under the settlement agreement, including payments to the employee, would remain intact, creating the possibility for an employee to sue the employer again after having received a settlement payment.  While the justification for the bill states, “[t]he bill would not, however, prohibit any termination of employment mutually agreed upon as part of a settlement, nor would it automatically force a defendant employer to rehire an employee who had previously settled a case against the employer,” it could expose employers to increased risk of multiple litigations with the same employee.

Both bills are ones to watch.

On March 16, 2021, the U.S. Court of Appeals for the D.C. Circuit affirmed defendant Shan Shi’s conviction for conspiracy to commit theft of trade secrets. Given recent efforts at the state and now federal level to ban non-competes, employers may be more likely to consider partnering with law enforcement to remedy trade secret theft.

The Court’s opinion begins with the statement, “We can’t always get what we want, but, sometimes, we get what we need.” Unfortunately, the Court’s opinion continues, what Shi’s company needed were seven documents containing a competitor’s trade secret information for manufacturing drill riser buoyancy modules (“DRBMs”), a highly valuable technology used for drilling miles of steel pipe that extend from drill ships to the ocean floor and for carrying oil from natural deposits tens of thousands of feet below the surface.

In March 2014, Shi, a Ph.D. with twenty-five years of engineering experience in offshore structural design, established Houston, Texas-based Construct Better Materials International (“CBMI”), a wholly owned subsidiary of Taizhou CBM-Future New Materials Science and Technology Co., Ltd. (“CBMF”), a technology company sponsored by the Chinese government. At the time, neither Shi nor anyone at CBMI or CBMF knew how to manufacture DRBMs. Only four major companies in the world produced DRBMs—namely, Cuming Corporation, Balmoral, Matrix, and Trelleborg AB (“Trelleborg”).

To study U.S. technology relating to the manufacture of DRBMs, Shi and two of his colleagues visited Trelleborg’s factory in Houston, and explored potential partnerships with other DRBM manufacturers. During these visits, Shi observed Trelleborg’s measures to keep its proprietary information confidential, including 24-hour security guards and video surveillance, visitor logs, keypad entry on restricted areas (e.g., research and development labs), escorts for visitors, and strict rules against taking pictures.

After Shi was unable to secure a partnership with any of the DRBM manufacturers, Shi hired two former Trelleberg employees. In the hiring process, these former Trelleborg employees informed Shi about additional measures Trelleborg took to protect its confidential information, including Trelleborg’s non-compete and non-disclosure provisions that required Trelleborg’s former employees not to reveal “any trade secrets or confidential information” they learned through their employment at Trelleborg.

Through these two former Trelleborg employees, Shi and his CBMI colleagues obtained seven documents containing Trelleborg’s trade secret DRBM technology. Using this trade secret information, Shi’s company was so successful at replicating Trelleborg’s DRBM technology that CBMI entered preliminary talks with Trelleborg’s Executive Vice President about potentially selling CBMI’s DRBM technology to Trelleborg. However, Trelleborg eventually decided not to purchase CBMI’s DRBM technology because it was too expensive. It is unclear if Trelleborg lodged a criminal complaint with federal law enforcement authorities against Shi and CBMI but it appears likely that they did.

Approximately two years later, when Shi and one of his colleagues attended a meeting to pitch their technology to a company they believed to be Lockheed Martin, FBI agents arrested them.

Shi, CBMI, CBMF, and five co-conspirators were charged with conspiracy to commit theft of trade secrets. Three co-conspirators pleaded guilty, one co-conspirator absconded before trial, and CBMI and CBMF never appeared, leaving Shi as the only defendant to stand trial.

To prove Shi guilty of conspiracy beyond a reasonable doubt pursuant to 18 U.S.C. § 1832, the government needed to show that (1) Shi entered into an agreement with at least one other person to commit theft of trade secrets; (2) he knowingly participated in the conspiracy with the intent to commit the offense; and (3) a member of the conspiracy committed at least one overt act in furtherance of the conspiracy. United States v. Smith, 950 F.3d 893, 895 (D.C. Cir. 2020). After three days of deliberations, the jury returned a guilty verdict.

On appeal, the D.C. Circuit rejected Shi’s contention that the evidence presented at trial was insufficient to allow a rational juror to find that he knowingly joined an agreement to steal trade secrets. The court held that the testimony provided by Shi’s co-conspirators—specifically, that (1) Shi hired one of the former Trelleborg employees after he told Shi that he had “some friends at Trelleborg” who would give him Trelleborg’s confidential data; and (2) Shi hired the other former Trelleborg employee after he told Shi that he kept “technical data from Trelleborg”—was sufficient for a rational juror to find that Shi entered into a tacit agreement to manufacture DRBMs using stolen trade secrets.

The appellate court also rejected Shi’s contention that the evidence was insufficient to show that Shi and at least one co-conspirator believed the appropriated information contained trade secrets. The Court pointed to Shi’s co-conspirator’s testimony that he understood that he “did wrong” by asking his friends for “confidential information” that Trelleborg “wouldn’t put . . . outside.”

The Court also summarized three independent bases on which the jury could conclude that Shi believed the data he received contained trade secret information that Trelleborg took reasonable measures to protect, namely, that: Shi visited Trelleborg’s factory and personally observed the high-level security measures that Trelleborg had in place to protect its DRBM manufacturing capabilities; testimony from government witnesses that Shi and others working in the field would know that DRBM manufacturers considered their manufacturing data to be proprietary; and Shi’s decision to draft CBMI’s own non-disclosure agreement after learning about Trelleborg’s non-disclosure and non-compete provisions.

The Court upheld the 16-month prison sentence and $342,000 fine levied against the Houston resident.

This criminal prosecution, a joint effort between the U.S. Attorney’s Office for the District of Columbia and the Department of Justice’s Computer Crime and Intellectual Property Section, underscores the U.S. Department of Justice’s growing expertise at prosecuting relatively complex intellectual property crimes.

Given the renewed bipartisan effort in Congress to pass the Workforce Mobility Act, a bill that would ban all employee non-compete agreements, it is conceivable that in the very near future employees nationwide might find themselves with greater employee mobility to leave one employer for another. If that happens, we could see an immediate uptick in federal criminal investigations and prosecutions involving allegations of theft of trade secrets.

Time will tell if we will see many more cases like the Shi case. At a minimum, with the changing legal landscape favoring employee mobility, employers who typically resorted to emergency civil actions to enforce non-compete provisions, confidentiality agreements, and trade secrets protections may find themselves working increasingly with federal law enforcement authorities to vindicate their trade secret rights under federal law. Similarly, companies that are growing their businesses in highly specialized industries may need to consult with experienced white-collar criminal defense counsel who have expertise in handling cases relating to employee mobility, non-compete agreements, and both civil and criminal trade secret laws.

On February 25, 2021, the Workforce Mobility Act, a bipartisan bill to limit the use of non-compete agreements, was introduced in the U.S. Senate by Senators Chris Murphy (D-Conn.), Todd Young (R-Ind.), Kevin Cramer (R-N.D.) and Tim Kaine (D-Va.), and in the U.S. House of Representatives by Scott Peters (D-Cal.).

This year’s Workforce Mobility Act is the latest of several attempts in recent years at the federal level to restrict non-compete agreements through legislation.  Despite bipartisan support at times, none has passed either the Senate or the House.  Will there be a different result this time around?

There may be some reason to think so.  The Biden administration appears to be in favor of banning one or more forms of non-competition agreements on a national level.  In December 2020, then President-elect Biden released a Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions, which stated “Biden will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements.”

Enactment of the Workforce Mobility Act in 2021, however, still seems like a long shot.  If the bill progresses in Congress, it will be subject to heavy lobbying from both sides of the issue.  For employers, the bill’s restrictions would have a major impact on businesses that seek to protect confidential information that may not rise to the level of trade secrets, including business strategy and client-related information.  If enacted, the bill also threatens to upend decades’ worth of legal precedent by introducing a federal statute that will be interpreted primarily in federal courts, in an area that has been governed by practice and precedent premised on a patchwork of state common law and some state statutes.  Stay tuned.

A recent report issued by the Trade Secrets Committee of the New York City Bar recommends that New York State’s legislature adopt statutory guidelines governing the use of non-compete agreements for lower-salary employees.

As explained in the report, statutory limitations on the use of non-compete agreements have been a hot issue in many states and even at the federal level in recent years.  New York currently has no statutory law generally concerning trade secrets or non-compete agreements.  The report advocates a limited change to New York’s unique status as a common law jurisdiction, namely, “enactment of a statute to regulate the use of non-compete agreements as applied to lower-salary employees in order to ensure equity and fairness in employment markets while preserving New York’s traditional role as the nation’s commercial leader.” The report is well worth a read.