Thomson Reuters Practical Law has released a new edition of “Preparing for Non-Compete Litigation,” a Practice Note co-authored by our colleague Peter A. Steinmeyer of Epstein Becker Green.

Following is an excerpt:

Non-compete litigation is typically fast-paced and expensive. An employer must act quickly when it suspects that an employee or former employee is violating a non-compete agreement (also referred to as a non-competition agreement or non-compete). It is critical to confirm that there is sufficient factual and legal support before initiating legal action. Filing a complaint for monetary damages or a request for an injunction can backfire if an employer is not prepared with sufficient evidence to support its request. This Note discusses the steps an employer can take to best position itself for successful enforcement of a non-compete and the strategic considerations involved with initiating non-compete litigation. In particular, it discusses:

  • Best practices for investigating a suspected violation and gathering relevant evidence.
  • Key steps for evaluating the likelihood a court will enforce a non-compete.
  • Factors to consider before initiating legal action.
  • The options for enforcing a non-compete through legal action and the key decisions relevant to each option.

Click here to download the full Note in PDF format.

Effective as of October 1, 2018, Massachusetts will become the 49th state to adopt a version of the Uniform Trade Secrets Act (leaving New York as the only holdout). Massachusetts did so as part of a large budget bill recently signed into law, which also resulted in the adoption of the Massachusetts Noncompetition Agreement Act. (The text of the Massachusetts version of the Uniform Trade Secrets Act is set out on pages 47-52 of the bill, H. 4868, while the effective date is set out on page 117. Here is a link to the entire budget bill.)

While there are differences from existing Massachusetts law regarding trade secrets, the new law is similar in most respects to the federal Defend Trade Secrets Act (“DTSA”). Nevertheless, the remedy provisions of the two laws are not identical, and there will be situations where greater relief is available under one statute than the other. For example, ex parte seizure orders are only available under DTSA, and attorney’s fees and exemplary damages are only available under DTSA if certain required disclosures about whistleblower immunity were made in agreements containing confidentiality provisions. The new Massachusetts law allows attorneys’ fees in circumstances of willful and malicious misappropriation and/or where claims or defenses are pursued in bad faith.

Additionally, employers should be aware that the Massachusetts statute does not apply to “misappropriation occurring prior to” October 1, 2018 or to “continuing misappropriation that began prior to” that date but continued after it.

We non-compete lawyers often rely on an old rule of thumb when analyzing the enforceability of a non-compete: if the restriction is so broad that it would even prohibit an employee from working as a janitor for a competitor, then it is very unlikely to be enforced by a judge. And so when a federal judge expressly endorses such a rule of thumb, the urge to blog about it is simply irresistible.

In Medix Staffing Solutions Inc. v. Daniel Dumrauf, Judge Ellis of the Northern District of Illinois addressed the enforceability of a restrictive covenant which prohibited employment in any capacity at another company in the industry.  The defendant argued that this restriction was so broad that it “would bar him from even working as a janitor at another company.”  While Judge Ellis described that example as “a bit far-fetched,” she nonetheless found “no language in the Covenant that makes it an inaccurate statement of [the Covenant’s] prohibitions.”  Accordingly, she held that the restriction was unenforceable on its face and that “[t]here is no factual scenario under which it would be reasonable.”  Accordingly, she held that “[t]his is an ‘extreme case’ where dismissal at the motion to dismiss stage is permissible and appropriate.”

And while noting that courts have the power to modify overbroad restrictive covenants, Judge Ellis refused to do so here, holding that Medix must instead “live with [its] decision” not “to draft an appropriate restrictive covenant.”

So, employers, the moral of the story is this: if your non-compete really would block an employee from working as a janitor for a competitor, it is time to update your non-compete, paying due heed, of course, to issues of adequacy of consideration for any such modification and other case law and statutory developments.

Epstein Becker Green attorneys Peter A. Steinmeyer, Robert D. Goldstein, and Brian E. Spang are pleased to be presenting 2017 Year in Review: Trade Secrets and Non-Compete Developments webinar on Wednesday, December 6, 2017 from 1:00 p.m. — 2:15 p.m. with Practical Law.

This webinar will provide insights into recent developments and expected trends in the evolving legal landscape of trade secrets and non-competition agreements. This webinar will focus on how to navigate this continually developing area and effectively protect client relationships and proprietary information.

Topics will include:

  • A review of recent developments and litigation trends under the Defend Trade Secrets (DTSA) since its enactment in 2016.
  • Newly passed state statutes addressing restrictive covenants, including who can enter into them, industry restrictions, and temporal restrictions.
  • Increased usage of “garden leave” clauses in lieu of non-competes.
  • Recent decisions regarding restrictive covenants, including whether a LinkedIn “invitation to link” is an improper solicitation.
  • Significant recent trade secret cases, including the level of detail required when pleading the existence of a trade secret.
  • Administrative agency developments regarding confidentiality clauses, including shifting agency trends under the Trump administration.
  • When are employers actually filing suit against former employees?

Click here for more information and to register for the webinar.

Earlier this week, Illinois Attorney General Lisa Madigan sued payday loan company Check Into Cash of Illinois, LLC for allegedly requiring that all of its employees in Illinois, regardless of position or pay, sign a standard non-compete agreement which broadly limits their employment mobility for one year post-termination.

According to the Complaint, Check Into Cash’s standard non-compete agreement effectively precludes employment with any entity that offers any “consumer lending service,” regardless of whether the entity is an actual competitor; it applies within a 15 mile radius of any of Check In To Cash’s more than 1,000 stores – regardless of the location where the employee actually worked; all employees are required to sign it; and employees receive no consideration for signing the agreement, other than the prospect of at-will employment.

The Complaint was brought pursuant to the recently enacted Illinois Freedom to Work Act (which bars non-competes for Illinois employees earning $13/hour or less), Illinois common law, and the Illinois Consumer Fraud and Deceptive Business Practices Act.

Although this lawsuit was filed in Illinois, there is similar political (and judicial) hostility to non-competes for low-wage workers across the country.  Given this climate, employers everywhere should take a moment to review any non-competes for low level or low wage employees and, if needed, take pro-active remedial action.

In this age of social media, a frequently asked question is whether social media activity can violate a non-compete or non-solicit.   Although the case law is evolving, courts which have addressed the issue have focused on the content of the communication, rather than the medium used to convey it.  In so doing, they have distinguished between mere passive social media activity (e.g., posting an update about a new job) as opposed to more targeted, active actions (e.g., not merely posting about a new job, but also actively recruiting former co-workers or clients).

A “LinkedIn” case recently decided by the Illinois Appellate Court, Bankers Life v. American Senior Benefits, involved conduct which fell between these two extremes: an individual, Gregory P. Gelineau, who was contractually barred from soliciting former co-workers, sent three former co-workers  generic requests to become “connections” via LinkedIn.  The requests did not go further than that, but they were not purely passive in that they sent to specific individuals.  Gelineau’s former employer, Bankers Life, filed suit, accusing him of breaching his non-solicitation obligation.

After surveying decisions from around the country involving various forms of social media activity, the Court explained that the different results reached in these decisions “can be reconciled when looking at the content and the substance of the communications.” Here, the Court noted that the LinkedIn requests sent by Gelineau did not discuss Bankers Life or Gelineau’s new employer, did not suggest that the recipient view Gelineau’s new job description, and did not encourage the recipient to leave Bankers Life and join Gelineau’s new employer.  Rather, they were bare requests to become “connections” on LinkedIn.

The Court held that such bare requests were not the sort of direct, active efforts to recruit which would have been a breach of Gelineau’s contractual non-solicitation clause.

While the facts of Bankers Life fall in between the two extremes of social media activity addressed by other courts, the case ultimately turned on an evaluation of the content of the activity, as opposed to the medium.  This approach is consistent with that taken by courts whenever they are tasked with determining whether particular conduct constitutes an unlawful “solicitation.”

Peter A. Steinmeyer and Lauri F. Rasnick, Members of the Firm in the Employment, Labor & Workforce Management practice, in the firm’s Chicago and New York offices, respectively, co-authored an article in Thomson Reuters Practical Law, titled “Garden Leave Provisions in Employment Agreements.”

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

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

Although the Trump Administration’s attitude toward non-compete agreements is unknown, the Obama Administration was disapproving of them. Both the US Department of Treasury and the White House issued reports in 2016 that questioned the widespread use of non-competes and suggested that they hampered labor mobility and ultimately restrained economic growth (see US Department of the Treasury: Non-Compete Contracts: Economic Effects and Policy Considerations (Mar. 2016) and White House Report: Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses (May 2016)). Some states have passed legislation essentially banning non-competes for certain categories of workers, such as low-wage workers in Illinois (820 ILCS 90/1) and technology sector workers in Hawaii (Haw. Rev. Stat. § 480-4(d)). In other states, such as California, almost all post-employment non-competes are unenforceable (Cal. Bus. & Prof. Code § 16600-16602.5).

With this background, employers are seeking alternatives to traditional non-compete agreements to protect their proprietary information and customer relationships. …

Download the full article in PDF format.

California has always been a challenging jurisdiction for employers in terms of limiting unfair competition by former employees and protecting trade secrets. However, employers in the state can significantly enhance their ability to protect their business interests in these areas with a little planning and strategic thinking.

In this issue of Take 5, we look at some proactive steps that employers can take to prevent unfair competition by departed employees and protect trade secrets from misappropriation:

Read the full Take 5 online or download the PDF.

In non-compete matters, it is often said that trial judges dislike enjoining individuals and will go out of their way to avoid doing so. A recent decision by the Florida Court of Appeals, Allied Universal Corporation v. Jeffrey B. Given, may be a good example of such a situation – as well as an example of an employer that took an immediate appeal and got the relief it wanted.

In Allied Universal, the trial court denied a motion for a preliminary injunction to enforce the terms of a non-compete with a former employee, even though the employee failed to rebut evidence that his non-compete was supported by legitimate business interests and that his former employer would suffer irreparable harm in the absence of an injunction.  Here, the legitimate business interests at issue were substantial relationships with specific prospective or existing customers and various types of proprietary information and pricing strategies.

Rather than presenting rebuttal evidence, the employee argued that because he had not yet begun to actively compete, he had not yet breached his non-compete.  Following an evidentiary hearing, the trial court denied the motion for a preliminary injunction, “finding only that Allied failed to show irreparable harm or absence of an adequate remedy at law.”

In contrast, based on the unrebutted evidentiary record, the appellate court held that the burden shifted to the employee to establish the absence of irreparable harm, and that because the employee failed to provide such evidence, the trial court’s denial of an injunction was an abuse of discretion.

While it is impossible to say what degree human empathy played in the trial court’s denial of the preliminary injunction, prudent practitioners in non-compete cases should never lose sight of that reality. They should also not forget that denials of requests for injunctive relief are immediately appealable, and if a request is justified under the facts and the law, an immediate appeal may be in order.

Insurance coverage is not something which comes to mind when thinking about trade secret misappropriation. In fact, since this blog was started in 2009, I cannot recall a single post about an insurance coverage issue.

That being said, one of the first things prudent defense counsel will do when a client is sued for alleged trade secret misappropriation is to instruct their client to notify their insurance carrier and inquire as to whether there is coverage for some or all of the claims. Sometimes there is; sometimes there isn’t.  However, the prudent course of action is always to play it safe and ask.

In a recent decision issued by Judge Dow in the U.S. District Court for the Northern District of Illinois, Sentinel Insurance Company, LTD v. Yorktown Industries, Inc., the defendant in what seems to have been a garden variety trade secrets misappropriation case  – Yorktown — demanded that its insurance carrier defend and indemnify it under its insurance policies.  The carrier denied coverage and denied having any duty to defend, and then brought a declaratory  judgment action seeking vindication for its position.

In the underlying lawsuit for which coverage and a defense was requested, Yorktown was sued for violation of the Uniform Trade Secrets Act, intentional interference with contractual relations, intentional interference with prospective business advantage, unfair competition, and civil conspiracy (i.e., claims commonly seen in these types of cases).

Yorktown requested indemnification under an insurance policy which provided coverage for claims for, among other things, “personal and advertising injury.” Yorktown’s argument was premised on the fact that it had been accused of stealing another’s “advertising idea.”

Judge Dow made short work of this claim, holding that Yorktown had merely been accused of stealing a customer list and sales information and wrongly using that information, and that this alleged misconduct did not amount to an allegation that Yorktown copied an “advertising idea” or copied trade secrets in an advertisement. Additionally, among other things, Judge Dow noted that the policy contained an express exclusion for claims predicated on the alleged misappropriation of a trade secret.

In these types of disputes, a common instance in which there may be coverage is where a breach of fiduciary duty is alleged, or where there is a claim against a director or officer and a “D & O” policy is implicated. Here, there was no mention of such claims.

While Yorktown came up short before Judge Dow, the prudent course of action in every trade secrets case is to notify the carrier and inquire about coverage.   Because insurance policies (and lawsuits) come in all sizes and shapes, sometimes there is coverage; sometimes there isn’t.