Daniel R. Levy

Subscribe to Daniel R. Levy

On May 10, 2018, the New Jersey Assembly Labor Committee advanced Assembly Bill A1769, a bill that seeks to provide stricter requirements for the enforcement of restrictive covenants.

If enacted, the legislation would permit employers to enter into non-competes with employees as a condition of employment or within a severance agreement, but such non-competes would only be enforceable if they meet all of the requirements set forth in the legislation. Thus, if enacted, employers will have to comply with the following requirements in order for a New Jersey non-competition agreement to be enforceable:

  1. If the non-compete is entered into in connection with commencement of employment, the employer must disclose the terms in writing to the prospective employee by the earlier of a formal offer of employment, or 30 business days before the commencement of the employee’s employment;
  2. If the non-compete is entered into after commencement of employment, the employer must provide the agreement to the employee at least 30 business days before the agreement is to be effective;
  3. The non-compete agreement must be signed by both the employer and the employee and expressly state that the employee has a right to consult with counsel;
  4. The non-compete shall not be broader than necessary to protect the legitimate business interests of the employer, including the employer’s trade secrets or other confidential information, such as sales information, business plans, and customer or pricing information;
  5. The time period of the non-compete must not exceed 1 year following the date of termination of employment;
  6. The non-compete must be reasonable in geographic scope, meaning that it must be limited to the geographic area in which the employee provided services or had a material presence during the two years preceding the date of termination, and the non-compete may not restrict the employee from seeking employment in other states;
  7. The non-compete shall be reasonable in the scope of the proscribed activities and limited to only the specific types of services provided by the employee at any time during the employee’s last two years of employment;
  8. The agreement must state that the employee will not be penalized for challenging the enforceability of the non-compete;
  9. The agreement should not contain a choice of law provision that would have the effect of avoiding the requirements of the legislation;
  10. The agreement shall not waive the employee’s substantive, procedural, or remedial rights provided under the legislation or any other law, or under the common law;
  11. The non-compete shall not restrict the employee from providing a service to a customer of the employer if the employee does not initiate or solicit the customer; and
  12. The agreement shall not be unduly burdensome on the employee, injurious to the public, or inconsistent with public policy.

The bill broadly defines “[r]estrictive covenant” as any agreement between an employer and an employee under which the employee “agrees not to engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.” It is unclear whether the bill intends to apply only to traditional non-compete agreements or whether it is also intended to apply to other forms of restrictive covenants, such as non-solicit and/or anti-raiding provisions. It appears, however, that the bill is intended to apply only to non-competes as the proposed legislation contains a provision stating that a restrictive covenant may be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative agreement, such as “an agreement not to solicit or hire employees of the employer; an agreement not to solicit or transact business with customers, clients, referral sources, or vendors of the employer; or a nondisclosure or confidentiality agreement.”

Moreover, the bill provides that any non-compete shall be unenforceable against all non-exempt employees, as well as other types of short-term or low-wage employees.

An employer who seeks to enforce the non-compete would be required to notify the employee in writing within 10 days after the termination of the employment relationship of the employer’s intent to enforce the non-compete. Failure to provide such notice shall void the agreement; however, notice need not be given in the event the employee was terminated due to misconduct.

Unless the employee was terminated for misconduct, the bill would also require employers who enforce a non-compete to pay the employee during the restricted period 100 percent of the pay that the employee would have been entitled and make whatever benefit contributions would be required in order to maintain the fringe benefits to which the employee would have been entitled.

If enacted, the legislation would allow employees to bring a cause of action against any employer or person alleged to have violated the act. In addition to injunctive relief, employees would be permitted to recover liquidated damages, compensatory damages, and reasonable attorneys’ fees and costs.

As with many other New Jersey employment laws, the bill would require employers to post a copy of the act or summary in a prominent place in the work area.

While the act would go into effect immediately upon enactment, it would not apply to any agreement in effect on or before the date of enactment.

If enacted, Assembly Bill A1769 would severely curb the use of non-competes in New Jersey. Employers should be aware of the multitude of requirements they would have to establish in order to enforce a non-compete, including the requirement to pay employees 100 percent of their salary during the time the non-compete is in effect. Thus, in the event the bill is signed into law, employers should now begin to consider implementing other types of agreements aimed at protecting their legitimate business interests, such as confidentiality agreements and non-solicit agreements in lieu of non-competition agreements.

Consider the following scenario: your organization holds an annual meeting with all Research & Development employees for the purpose of having an open discussion between thought leaders and R&D regarding product-development capabilities. This year’s meeting is scheduled outside the United States and next year’s will be within the U.S. with all non-U.S. R&D employees traveling into the U.S. to attend. For each meeting, your employees may be subject to a search of their electronic devices, including any laptop that may contain your company’s trade secrets. Pursuant to a new directive issued in January 2018 by the U.S. Custom and Border Protection (“CBP”), the electronic devices of all individuals, including U.S. citizens and U.S. residents, may be subject to search upon entry into (or leaving) the U.S. by the CBP. CBP Directive No. 3340-049A (Jan. 4, 2018).

The directive allows for the warrantless border search of electronic devices without a showing of reasonable suspicion. It differentiates between a basic search and an advanced search. A basic search allows officers, with or without suspicion, to examine an electronic device, including an examination of the information that is resident and accessible on the device. Information that is solely stored remotely may not be accessed. An advanced search is one in which the officer connects external equipment, through a wired or wireless connection, to an electronic device in order to “review, copy, and/or analyze” the contents of the electronic device. Advanced searches are permitted where there is a “reasonable suspicion” of criminal activity or for national security concerns. While the directive states that “[m]any factors” may create a reasonable suspicion or a national security concern warranting an advanced search, it articulates examples particularly aimed at national security concerns but does not provide much color as to what may constitute reasonable suspicion of criminal activity.

By issuing the directive, the CBP appears to align its position with that of the majority of federal courts that held reasonable suspicion is not required for border searches of electronic devices. See, e.g., United States v. Ickes, 393 F.3d 501, 506-07 (4th Cir. 2005) (rejecting reasonable suspicion requirement for laptop computer searches at the border); United States v. Linarez-Delgado, 259 Fed. Appx. 506, 508 (3d Cir. 2007) (rejecting reasonable suspicion requirement for border search of electronic data). Thus, the CBP may have also sought to reject the statements by at least one other court suggesting a requirement for a showing of reasonable suspicion before search of an electronic device. See, e.g., United States v. Cotterman, 709 F.3d 952 (9th Cir. 2013) (implying that officers need reasonable suspicion to conduct a border search of complex personal computing devices).

Can’t your employees just encrypt everything before international travel? Under the directive, travelers are required to present the electronic device (and the information contained within the device) in a condition that allows for the inspection of the device and its contents. Therefore, under the directive, officers may request an individual’s assistance in accessing the device if it is encrypted or password protected, and officers are authorized to detain a device pending a determination as to its admissibility in to the U.S.; they may also exclude a device if access to it is prevented by encryption or password protection.

The directive provides officers with instructions regarding the handling of certain sensitive materials, including business information, medical records, and information protected under the attorney-client privilege. Upon encountering business or commercial information resulting from a search, such as confidential business information, officers are required to “protect that information from unauthorized disclosure[.]” Such confidential business information may only be shared with agencies or entities that have mechanisms in place to protect the information.

Companies should alert employees of the requirements under the new directive. Certain preventative steps should be considered to minimize the potential for disclosure of confidential information at the border, including: (1) minimizing the number of electronic devices with trade secret or confidential information; (2) minimizing the amount of confidential information on a device; (3) to the extent possible, using electronic devices that do not contain confidential information when international travel is required; and (4) considering whether confidential information on the device should be encrypted but with the knowledge that CBP may request that the device be unlocked. Companies should also be cognizant of other issues relating to encrypted devices, including U.S. export control requirements for traveling to certain countries and licenses that may be required for individuals traveling into certain countries with an encrypted device.

In the event of an inspection request by an officer, your employees should be prepared to alert the officer that the device contains confidential business information in order to protect against its disclosure. Employees should also carry company business cards to show officers requesting an inspection that they are an employee of your company.

flags-shutterstock_125735678

Consider the following scenario that was the premise of the book Charlie and the Chocolate Factory (1964), and later adapted into the classic film Willy Wonka & the Chocolate Factory (1971): your company (Willy Wonka Chocolates) is in the candy business and develops an idea for an everlasting gobstopper (a sucking candy that never gets smaller).  Anticipating substantial profits from the product, the company designates the everlasting gobstopper formula as a trade secret.  As in the book and film, a rival chocolate company (Slugworth Chocolates) seeks to steal the trade secret formula in order to develop and market a competing gobstopper.

While Charlie and the Chocolate Factory is premised on a local competitor seeking to steal trade secrets for its own business, this post focuses on an adaptation to the story based in today’s global economy, and more specifically, the actions a company may take within the United States and abroad to protect against trade secret misappropriation.

Most U.S. companies are now aware of the protections afforded by the Defend Trade Secrets Act of 2016, 18 U.S.C. §§ 1836, et seq. (the “DTSA”).  Of most importance is that the DTSA created a uniform legislation that provides companies with a private civil cause of action for trade secret misappropriation.  As a result of enactment of the DTSA, a company that is the victim of trade secret theft has standing to file a civil suit in federal court.  The company may also report the theft to the United States Department of Justice because, in certain cases, the theft of trade secrets constitutes a crime under the federal Economic Espionage Act, 18 U.S.C. §§ 1831, et seq. (the “EEA”).

Due to jurisdictional limitations, however, the DTSA and EEA may not provide adequate protection when there has been a misappropriation of trade secrets in the international arena. Companies should, therefore, be aware of other methods to protect against trade secret misappropriation abroad.  One method is through the United States International Trade Commission (the “ITC”), an independent, quasi-judicial federal agency with broad investigative responsibilities on matters of trade. Pursuant to the Smoot-Hawley Tariff Act of 1930 (the “Act”), the ITC has jurisdiction to investigate and can render unlawful, the importation of goods stemming from “unfair methods of competition and unfair acts in the importations of articles … in the United States.”  The ITC has determined that trade secret misappropriation is a form of unfair competition that is protected under Section 337 of the Act, and the United States Courts of Appeals for the Federal Circuit has affirmed this interpretation in two separate cases. See Sino Legend Chemical Co. v. ITC, 623 Fed. Appx. 1016 (Fed. Cir. 2015), cert. denied, 196 L. Ed. 2d 517 (2017); TianRui Group Co. Ltd. v. ITC, 661 F.3d 1322, 1327 (Fed. Cir. 2011).

In Sino Legend Chemical Co., employees had been working for a U.S.-based company at a facility in China.  The employees stole trade secrets from the company and brought them to Sino Legend Chemical Co., a competitive Chinese company that began developing a competitive product and sought to sell it in the United States.  The U.S. company filed a complaint with the ITC, and after investigation, the ITC instituted a 10-year ban on the importation of products resulting from trade secret misappropriation that had occurred entirely outside the United States.  On appeal, Sino Legend urged the Federal Circuit to overturn the ITC’s decision, arguing that Section 337 of the Act should not apply because the trade secret misappropriation occurred entirely outside the United States.  The Federal Circuit disagreed and affirmed the 10-year ban instituted by the ITC, and in 2017, the United States Supreme Court declined review.

A company should be aware that even if a theft of trade secrets occurs abroad, the company may seek relief through the ITC to prevent the importation of competitive products into the United States that are developed as a result of the stolen trade secrets. Of course, relief through the ITC is limited because the ITC cannot stop the offending company that stole the trade secrets from marketing a competitive product in countries outside the U.S.  There remain, however, other methods to protect against the misappropriation of trade secrets abroad.

Similar to the DTSA, the European Union (“EU”) enacted its own framework for the protection of trade secrets via a directive that went into effect on June 8, 2016. The EU directive provides protection of “undisclosed know-how and business information against their unlawful acquisition, use and disclosure.”  Although the EU directive does not establish criminal sanctions, it does provide for civil means through which victims of trade secret misappropriation can seek protections, such as: (i) allowing for temporary restraining orders and injunctive relief; (ii) removal from the market of goods manufactured based on stolen trade secrets, and (iii) monetary damages.  Pursuant to the EU directive, each member country must incorporate the required provisions into its laws by June 9, 2018.  Importantly, the EU directive contains only the minimum requirements for the protection of trade secrets; however, each EU member country may elect to enact stronger protections.  It remains to be seen whether the EU countries will enact provisions more stringent than the EU directive.

Companies need to protect themselves from the Slugworths of the world. In Charlie and the Chocolate Factory, Slugworth was a local competitor that sought to steal Willy Wonka’s trade secrets, but in today’s global economy, Slugworth can steal trade secrets from anywhere and can also market competitive products throughout the globe.  As a result, companies need to be well versed in the various global protections against misappropriation of trade secrets.  Use of counsel knowledgeable of these various protections is critical to ensure that all avenues of relief are considered.