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Trading Secrets

A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Bring Out the Body Bags: Seller’s Covenant, In Asset Sales Agreement, Not To Compete Within 150 Miles For 10 Years Unenforceable

Posted in Non-Compete Enforceability, Restrictive Covenants, Trade Secrets

shutterstock_406019920Palmetto bought the assets of Knight Systems’ mortuary transport business. The agreement of purchase and sale included (a) Palmetto’s commitment to buy body bags, at specified discounted prices, exclusively from Knight Systems for 10 years, and (b) Knight Systems’ promise not to provide mortuary transport services within 150 miles of Palmetto’s offices for the same period.  Notwithstanding the non-compete covenant, a few years later Knight Systems submitted a timely proposal — and was selected — to provide those services to a Palmetto customer within the 150-mile territory.  Palmetto sued Knight Systems for breach of contract, won below, but lost in the South Carolina Court of Appeals.

Status of the case.  By consent, Palmetto’s complaint and Knight Systems’ counterclaim were tried before a court-appointed referee.  Concluding that the geographic restriction in the non-compete was reasonable, he ruled in favor of Palmetto and awarded $373,000.  The Court of Appeals reversed and remanded. Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., No. 2014-001819 (S.C. Court of Appeals, May 4, 2016).

Background. Four years after the purchase and sale transaction, Palmetto customer Richland County published a RFP with regard to providing mortuary transport services to the county for five years.  The day before the deadline for responding, Knight Systems accused Palmetto of purchasing body bags from others in violation of its commitment to buy those products exclusively from Knight Systems.  Palmetto replied that it had spent a minimal amount, less than $450 (1% of the aggregate amount it had paid Knight Systems), for products covered by the contract’s exclusivity provision.

Knight Systems was the only source for the odor-proof body bags required by the RFP. Shortly before the contract was awarded, it informed Richland County that it (Knight Systems) intended to take those products off the market.  This would leave Palmetto unable to satisfy a contractual condition.  Whether for this reason or otherwise, and despite Palmetto’s contention that it had submitted the most favorable proposal, Knight Systems was awarded the contract.

Reversal of the referee’s decision. The only issue addressed on appeal was the reasonableness of the geographic limitation in the assets sale agreement.  According to the court, the referee cited two bases for his conclusion that the limitation was reasonable.

  • Palmetto’s owner testified that it wanted the 150-mile restriction included in the purchase and sale agreement because, although Knight Systems did mortuary transport business in only two South Carolina counties, Palmetto was considering an expansion of the territory.  The appellate tribunal held that this testimony did not justify a restriction encompassing parts of three states, especially since there was insufficient “evidence of definitive planning, acquisitions, or other overt acts” in support of possibly enlarging the service area.
  • A Knight Systems owner testified that the company did not object to including the restriction in the agreement because, at that time, Knight Systems had not intended to get back into the business after the sale to Palmetto.  The court said Knight Systems’ “intention of not returning to the mortuary transport business is [not] a relevant factor for analyzing whether a territorial restriction is reasonable.”

Lastly, the Court of Appeals addressed the possibility of “blue penciling” the 150-mile restriction. That would be permissible under South Carolina law, the judges said, only if the agreement authorized redrawing the provision.  The Palmetto-Knight Systems contract did not so authorize.  Accordingly, blue penciling would mean inserting “an arbitrary term” as to which the parties neither negotiated nor agreed.

Takeaways. Many judicial opinions state that restrictive clauses in a non-compete contained in an employment agreement must be reasonable or they are subject to being invalidated. Palmetto makes the same point regarding restrictions in an assets sale contract.

Palmetto also teaches that when drafting a non-competition and/or a non-solicitation clause for an employment or sales agreement, consider authorizing a decision-maker to modify unreasonable geographic and duration provisions.  However, trade secret confidentiality clauses — not involved in the Palmetto case — rarely are invalidated because of allegedly unreasonable territorial or time restrictions (such clauses are subject to being stricken in their entirety by a court holding that there is no substantial risk of disclosure).

Umpteenth Time’s the Charm? Massachusetts Has Another Go At Non-Compete Reform

Posted in Legislation, Trade Secrets

shutterstock_170169599The Massachusetts legislature is back at it again — as the Boston Globe reports, the Joint Committee on Labor & Workforce Development has sponsored a compromise bill with the goal of limiting non-competes in the Commonwealth.

As our readers may recall, for nearly a decade, Massachusetts legislators have attempted to pass legislation regarding non-competes, to no avail.  In fact, in recent years, there have been unsuccessful attempts to join California in banning non-compete agreements outright (including a failed proposal by former Governor Deval Patrick himself).

Now, with still over 2 months to go before the formal legislative session ends, legislators are once more taking a crack at it, although unlike the attempts to ban non-competes 2 years ago, the current bill may not be nearly as concerning to proponents of non-competes.

That said, the proposed legislation is not controversy-free. In fact, the inclusion of a provision requiring “garden leave,” which would force employers to pay former employees bound by non-compete agreements 50% of their highest annualized salary over the last 2 years of employment for the restricted period, has prompted many in the business community to express their concern.  Some, such as executive vice president of the Associated Industries of Massachusetts, Chris Geehern, have noted that employees who are bound by non-competes are often highly-paid employees to begin with, who may receive the benefit of inflated compensation in their base salary to reflect the fact that they are so bound.  Likewise, the Greater Boston Chamber of Commerce’s president and CEO, Jim Rooney, told the Boston Globe that the inclusion of the garden leave provision was “unexpected,” and likely “would be a problem for [the Chamber].”  Notably, we are unaware of any other jurisdiction in the United States that requires — statutorily or otherwise — “garden leave” payments as a prerequisite for the enforcement of non-competes.

Other provisions of the proposed legislation may cause some consternation for businesses, or at the very least, may require those businesses to change their practices. For example:

  • The proposed legislation prohibits judicial reform of non-competes in contrast to current Massachusetts common law.  This provision could have disastrous results for employers who have a good-faith belief that their agreement is reasonable and enforceable, but whose agreements are nonetheless found to be over-reaching by a reviewing court. Without the ability to reform the agreement, the proposed legislation could be read to require the court to strike the entire agreement. The proposed legislation does not indicate whether it merely prohibits reformation in the sense that a court could not replace a nationwide restriction with a 10 miles restriction, for example, or if a court could not even “blue pencil” the agreement to strike only offending portions of the non-compete and leave the remainder.
  • As is the case in certain other states, the bill would do away with “continued employment” as sufficient consideration for the non-compete agreement.  This could be potentially costly for employers seeking to enter into non-compete agreements with existing employees as they will need to provide some other form of consideration.
  • With certain exceptions (addressed below), the proposed legislation limits the length of non-competes to 1 year.  While this is certainly an improvement from a prior bill that would have rendered agreements lasting longer than 6 months “presumptively unreasonable,” some Massachusetts employers may find a one-year period insufficient to protect their legitimate business interests, particularly given that courts in the Commonwealth have historically found that longer restrictions are warranted in some cases.
  • Notwithstanding the one-year limit noted above, the bill allows a longer restricted period if “the employee has breached his or her fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, in which case the duration may not exceed 2 years from the date of cessation of employment.”  It is unclear whether this provision merely suggests that the restricted period will be tolled in the event the employee has acted improperly.
  • The bill prohibits non-competes for employees “classified” as non-exempt under the Fair Labor Standards Act (“FLSA”) (although the bill does not clarify by whom the employee would be classified — the employer, or the Department of Labor?), student interns or grad/undergrad students engaged in short-term employment while enrolled in school, employees who have been terminated without cause or laid off, or employees aged 18 or under.  While most of these categories will likely be accepted by the business community as common-sense, some may find the prohibition on non-competes for any and all non-exempt employees to be overly simplistic. Some businesses will likely seek for the legislature to carve out non-exempt employees who have unique access to the employee’s confidential  and/or trade secrets in order to perform the functions of their jobs.

Additionally, as we have observed in many posts on our Wage and Hour Litigation Blog, the FLSA’s overtime exemptions are not always a model of clarity and can be a moving target.  Accordingly, if an employee is exempt (and otherwise can legally be bound by a non-compete agreement under the proposed legislation) at the time of execution, but later becomes non-exempt due to changing FLSA regulations or caselaw, it is unclear whether a court would enforce a non-compete against the employee.  Given that the bill provides that a “noncompetition agreement shall not be enforceable against . . . an employee who is classified as nonexempt” (emphasis added), as opposed to “was classified as nonexempt at the time of execution,” it appears likely that changes in the FLSA regulations could instantaneously prohibit an employer from enforcing certain non-compete agreements that were enforceable the day prior, without any change in an employee’s roles or responsibilities.

  • The proposed legislation also prohibits choice-of-law provisions that would avoid the effects of the bill where the employee, for the 30 days preceding the cessation of employment, is a Massachusetts resident or was employed in the Commonwealth.  This provision could prove difficult for multi-state employers, who will need separate agreements for Massachusetts employees (and would need to rigorously and regularly review where its employees reside or work, in case an employee relocates).  It also means an employee could move to Massachusetts specifically to avoid enforcement of his or her non-compete.
  • The bill also purports to grant exclusive jurisdiction for any disputes relating to non-compete agreements in the Massachusetts superior courts or the Business Litigation Session of the Suffolk County superior court.  This suggests that parties may be prohibited from bringing claims related to non-compete agreements in federal court (which may be unconstitutional), potentially leading to claim-splitting (such as where an employer wishes to also assert a Defend Trade Secrets Act claim or other claims in federal court), and may unnecessarily tax the already burdened superior courts of the Commonwealth.
  • The bill also defines “employee” to include independent contractors, notwithstanding the many fundamental differences between employees and independent contractors under Massachusetts law.   It’s unclear why the committee chose to define “employee” in this way, given that its definition as drafted seems to have no rational tie to “employee” as that term is used in other laws.

Not all provisions of the bill will be concerning to employers. For example, the legislation will not be retroactive  — a major improvement over previous attempts to limit non-competes.  Nor would the bill affect non-solicit provisions, non-disclosure agreements, non-competes made in connection with the sale of a business (or otherwise made outside of employment relationships), forfeiture agreements, or agreements not to reapply for employment.  Other uncontroversial provisions include requirements that the agreement be signed, in writing, state that the employee has the right to consult with counsel, and must be provided to the employee by the earlier of a formal offer of employment or 10 business days before the commencement of the employee’s employment (which are already considered best practices for enforcement of non-competes in Massachusetts).  Finally, the bill also would adopt the Uniform Trade Secret Act, which would leave New York as the lone hold-out.

At this point, the bill may move straight to a vote, or may be further discussed in the Ways & Means committee. In any event, given the apparent appetite in the Commonwealth both in the legislature and in the business community to come to some form of compromise, it appears that there is a fair chance we will see some non-compete legislation passed this year, or early in the next session.

Stay tuned…

Webinar Recap! Trade Secrets, Restrictive Covenants and the NLRB: Can They Peacefully Coexist?

Posted in Restrictive Covenants, Social Media, Trade Secrets

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By Gary Glaser, James McNairy and Marc Jacobs

We are pleased to announce the webinar “Trade Secrets, Restrictive Covenants and the NLRB: Can They Peacefully Coexist?” is now available as a podcast and webinar recording.

In Seyfarth’s fifth installment of its 2016 Trade Secrets Webinar series, Seyfarth attorneys, Gary Glaser, Jim McNairy and Marc Jacobs, conveyed strategies and best practices to help you, as in-house counsel and HR professionals, to ensure that your company and internal clients are protected.

As a conclusion to this well-received webinar, we compiled a list of  brief summaries of the more significant cases that were discussed during the webinar:

  • The National Labor Relations Act applies to all private sector workplaces — not just unionized facilities.   Among other things, the Act protects an employee’s right to engage in protected concerted activities, which in general are group action (usually by two or more employees) acting together in a lawful manner, for a common, legal, work-related purpose (e.g., wages, hours and other terms and conditions of employment).  Limits on these rights and retaliation against an employee for engaging in protected concerted activity violates the Act.  The National Labor Relations Board is aggressively protecting employees’ rights to engage in protected concerted activity. As part of this effort, the NLRB will find unlawful workplace rules, policies, practices and agreements that explicitly restrict Section 7 activities (such as a rule requiring employees to keep their wage rate confidential) or that employees would reasonably believe restricts their Section 7 rights (e.g., a confidentiality agreement or policy that generally includes in the definition of confidential information “personnel information”).
  • In the 2015 Browning-Ferris Industries decision, the NLRB substantially broadened the definition of “joint employer”.  Under this new expanded definition, an entity can be found to be a joint employer if it has the authority, even if unexercised, to control essential terms and condition of employment.  As a result, if one entity has agreements with other entities to provide labor or services, that entity may be a joint employer of the other entities’ employees based on the level of control it has over the terms and conditions of employment of the other entities/ employees.  One indicia of that control would be requirements for hiring or employment, such as requirements to sign agreements or adopt policies for the protection of confidential information and similar restrictions.
  • As a result, and also because of the signing of the federal Defend Trade Secrets Act on the day after our program [insert link to post about it], now is a critical time for all employers to review their policies, practices, procedures and agreements (1) regarding the protection of confidential information; and (2) with third-party service and labor providers.  In reviewing confidential information policies and agreements, the focus should be on narrow tailoring using specifics and examples to protect information that lawfully may be protected in a lawful manner.  For agreements with parties, the review should include an analysis of the factors that may show joint employer status so that you can balance the risk of a joint employer finding with the needs to protect your organization.

Join us Monday, May 16 at 2:00 p.m. Central. for our next webinar, “The Defend Trade Secrets Act: What Employers Should Know” To register, click here.

Upcoming Webinar! The Defend Trade Secrets Act: What Employers Should Know Now

Posted in Legislation, Trade Secrets

WebinarOn May 11, 2016, President Obama signed the Defend Trade Secrets Act (“DTSA”), which Congress passed on April 27, 2016. With President Obama’s signature, the DTSA has now become the law of the land, and a federal civil remedy for trade secrets misappropriation now exists.

What does the passage of the DTSA mean for your company?

On Monday, May 16 at 2:00 p.m. Central, in Seyfarth’s sixth installment of its 2016 Trade Secrets Webinar series, Seyfarth attorneys will describe the key features of the DTSA and compare its key provisions to the state Uniform Trade Secrets Act (“UTSA”) adopted in many states. They will also provide practical tips and strategies concerning the pursuit and defense of trade secret cases in light of the DTSA, and provide some predictions concerning the future of trade secret litigation.

The Seyfarth panel will specifically address the following topics:

  • Brief history of the DTSA
  • What does the DTSA provide?
  • Provisions unique to the DTSA
  • The DTSA’s whistleblower immunity provision
  • The DTSA’s notice requirements for agreements entered into or updated as of today
  • Strategies in trade secret litigation in light of the DTSA
  • What should an employer or business do now?

register

If you have any questions, please contact events@seyfarth.com.

*CLE Credit for this webinar has been awarded in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

Georgia’s Restrictive Covenants Act Turns Five Years Old: Assessing the Impact of Georgia’s Law Five Years On

Posted in Non-Compete Enforceability, Restrictive Covenants

shutterstock_292151738While the federal Defend Trade Secrets Act is garnering a great deal of attention, it’s worthwhile to remember that state law remains critically important in drafting restrictive covenants.  This week, May 11, 2016, marks the fifth anniversary of Georgia’s revised trade secrets act, which fundamentally recast how courts view and enforce restrictive covenants.

Prior to enactment of the new law, Georgia was one of the most difficult states in which to enforce restrictive covenants against employees.  As a result, before the revised act, employees sometimes moved to Georgia to take advantage of Georgia’s extremely pro-employee public policy.  (In fact, some lawyers commented — only half -jokingly — that their clients should go to Las Vegas to get out of their marriage and go to Atlanta to get out of their non-compete.)

The new act implemented a sea change in Georgia’s public policy towards restrictive covenants.  The new act substantially liberalizes drafting requirements for restrictive covenants in Georgia (which, before the new act, were governed by a series of arcane court decisions that imposed a variety of highly technical drafting requirements).  Perhaps most notably, the new act permits Georgia courts to “blue pencil” or partially enforce overbroad restrictive covenants (though the Georgia courts have had few opportunities to exercise that new power).  As a result, with enactment of the new law, Georgia is one of the more favorable jurisdictions for enforcement of restrictive covenants in employment agreements.

In our one-year anniversary post on the act’s passage, we made three predictions: (1) Georgia courts would be considerably more likely to enforce restrictive covenants under the new act than they had under prior Georgia law, (2) Georgia courts would “blue pencil” overbroad restrictive covenants, and (3) Georgia courts would continue to apply prior Georgia law to agreements that predate the new act.  Five years later, the jury is still out.  Few published or appellate decisions have examined the revised act.  Although some trial courts have grappled with the act in recent years, there has not been enough time for agreements signed after May 11, 2011 to make their way into more than a handful of published or electronically-available decisions.

Nevertheless, one decision over the past few years, Cellairis v. Duarte, is particularly notable.  That case (which we previously examined here as an illustration of the difficulties in drafting effective carveouts from arbitration provisions) suggests that courts are more likely to enforce restrictive covenants under the new law, just as we predicted four years ago.

In Cellairis, a franchisor sued a former employee who, at various times, worked as an officer, employee, and independent contractor.  A 2014 franchise agreement between the franchisor and employee obligated the employee to refrain from owning or operating a competing business within 10 miles of any franchise operating as of the termination date.  The franchise agreement also contained a two-year non-solicitation provision prohibiting the employee from soliciting any customer who the franchisee or the employee did business with in the two years preceding the agreement’s termination.

The franchisor moved for and obtained a preliminary injunction.  The court sidestepped the employee’s multifaceted career with the franchisee by analyzing the restrictive covenants as if the employee worked only as an employee.

The court quickly found that a two-year restriction was “presumptively reasonable” under Georgia’s new act and brushed aside the employee’s attempts to argue that it was still unreasonable.  The court also honored the new act’s position on geographic limitations; it held that a 10-mile radius from any franchise, even those that did not exist when the agreement was signed, was reasonable.

Unlike previous restrictive covenant decisions, the court did not limit the non-compete and non-solicitation to customers that the employee managed.  This is a clear departure from pre-amendment Georgia law, which routinely struck down restrictive covenant agreements that were untethered from customers managed by the former employee.

Finally, the court found that the public interest now favored the entry of a preliminary injunction because “reasonable restrictive covenants . . . serve the legitimate purpose of protecting business interests and creating an environment favorable to attracting commercial enterprise to Georgia and keeping existing businesses within the state.”  Formerly, the public interest element always weighed against imposing a preliminary injunction.  This decision suggests a party moving for a preliminary injunction can always cite to public interest as a factor favoring preliminary injunctive relief because even overly broad restrictive covenants can be “blue penciled” to reasonable limitations on competition.

Takeaways

The Cellaris decision illustrates the profound impact that the new act has on restrictive covenants signed on or after May 11, 2011.  Restrictive covenant agreements governed by pre-act law remain vulnerable.  Employers with restrictive covenants signed before May 11, 2011 should sign new agreements to erase any doubts about which law governs.  (Some decisions have found that pre-act restrictive covenants amended after May 11, 2011 are still governed by pre-act law.)

Employers should also feel more comfortable about seeking preliminary injunctive relief if they can present evidence that a former employee is violating a restrictive covenant.  With the public interest on its side and a blue pencil in hand, courts seem less hesitant to impose preliminary injunctive relief — even though the federally governed standard for preliminary injunctive relief has not changed.

Finally, practitioners should look to federal Alabama and Florida decisions until Georgia state courts have established Georgia’s position on post-act restrictive covenants.  The Cellaris court looked to Florida law to guide its analysis.  Without any binding authority, these out-of-state decisions should serve as a rough proxy for how much evidence a district court wants to see before it grants preliminary injunctive relief.

If you have any questions about how the May 2011 revisions to Georgia’s law on restrictive covenants affects your restrictive covenants portfolio, or if you would like assistance drafting compliant agreements for your workforce, please contact a Seyfarth Shaw Trade Secrets Group attorney.

***

Alex Meier, a co-author of this post, had the honor to serve as a clerk to Judge O’Kelley the presiding district court judge in the Cellaris case. The analysis of the case in this blog reflect the author’s view alone and should not be construed as an endorsement of either litigant’s position.

President Obama Signs the Defend Trade Secrets Act: Tips for Navigating the New Law

Posted in Legislation, Trade Secrets

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Seyfarth Synopsis: A new federal civil cause of action is now available to trade secrets owners seeking to pursue claims of trade secret misappropriation under the Defend Trade Secrets Act (“DTSA”).  To take full advantage of the remedies provided  under the DTSA, companies have an immediate obligation to provide certain disclosures in all non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following today.  Our post provides a brief history and summary of the DTSA, and, notably, provides business owners a list of tips and strategies to implement in light of the DTSA’s passage.

Today, President Obama signed into law the Defend Trade Secrets Act of 2016, which Congress passed on April 27.

What does the passage of the DTSA mean for your company? In a nutshell, it means your company can now pursue claims for trade secret misappropriation in federal court like other forms of intellectual property (i.e., patent, trademark, copyright) and seek remedies such as a seizure order to recover misappropriated trade secrets.  It also serves as a reminder that trade secrets can be highly valuable to your company and that you should ensure that your company has identified such assets and put in place reasonable secrecy measures to protect them.

Below, we provide an overview of the DTSA’s key provisions.  We also provide tips and strategies in light of the passage of the DTSA.

What Does the DTSA Provide?

The DTSA authorizes a civil action in federal court for the misappropriation of trade secrets that are related to a product or service used in, or intended for use in, interstate or foreign commerce.  Prior to the passage of the DTSA, civil trade secret claims were solely a matter of state law, with 48 states having adopted some version of the Uniform Trade Secrets Act (“UTSA”) and the remaining states recognizing common law claims for misappropriation of trade secrets.  While the DTSA does not displace these state law claims, it provides a federal civil claim above and beyond the state law claims that previously existed.

How Does the DTSA Work?

The DTSA creates a uniform standard for trade secret misappropriation by expanding the Economic Espionage Act of 1996 (“EEA”) to provide a federal civil remedy for trade secret misappropriation.  The DTSA also provides pathways to injunctive relief, monetary damages, and other remedies in federal court for companies whose trade secrets are misappropriated, including via ex parte property seizures (subject to various limitations).   Through the ex parte seizure provision, a plaintiff can seek to have the government seize misappropriated trade secrets without providing notice to the alleged wrongdoer.  The DTSA further harmonizes the differences in trade secret law under the UTSA and provides more uniform discovery procedures.

What Are the Significant Provisions of the DTSA?

The DTSA provides aggrieved parties with legal recourse in federal court via a federal trade secret cause of action (whereas previously, relief was only available under the state law UTSA or common law claims), as well as new remedies, including a seizure order.  Below are the key provisions of the statute:

  • The DTSA provides for actual damages, restitution, injunctive relief, significant exemplary relief (up to two times the award of actual damages), and attorney’s fees.
  • Ex parte property seizures are available to plaintiffs, but subject to limitations. As noted above, an ex parte seizure means that an aggrieved party can seek relief from the court against a party to seize misappropriated trade secrets without providing notice to the alleged wrongdoer beforehand.  As a measure to curtail the potential abuse of such seizures, the DTSA prohibits copies to be made of seized property, and requires that ex parte orders provide specific instructions for law enforcement officers performing the seizure, such as when the seizure can take place and whether force may be used to access locked areas.  Moreover, a party seeking an ex parte order must be able to establish that other equitable remedies, like a preliminary injunction, are inadequate.
  • Injunctive relief for actual or threatened misappropriation of trade secrets is available in federal court.  However, a court will not enjoin a person from entering into an employment relationship unless there is a showing through evidence of “threatened misappropriation and not merely on the information the person knows.”  This language was included in the DTSA to guard against plaintiffs pursuing “inevitable disclosure” claims.
  • The statute of limitations is three years.  A civil action may not be commenced later than 3 years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered.
  • A whistleblower immunity provision exists to protect individuals from criminal or civil liability for disclosing a trade secret if it is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for the purpose of reporting a violation of law.  Similarly, a related provision states that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding as long as the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.
  • The immunity provision places an affirmative duty on employers to provide employees notice of the new immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  This notice provision applies to contracts and agreements that are entered into or updated after the date of DTSA’s enactment (May 11, 2016).
  • An employer will be in compliance with the notice requirement if the employer provides a “cross-reference” to a policy given to the relevant employees that lays out the reporting policy for suspected violations of law. Should an employer not comply with the above, the employer may not recover exemplary damages or attorney fees in an action brought under the DTSA against an employee to whom no notice was ever provided. Curiously, the definition of “employee” is drafted broadly to include contractor and consultant work done by an individual for an employer.
  • The “Trade Secret Theft Enforcement” provision increases the penalties for a criminal violation of 18 U.S.C. § 1832 from $5,000,000 to the greater of $5,000,000 or three times the value of the stolen trade secrets to the organization, including the costs of reproducing the trade secrets.
  • The DTSA further amends the RICO statute to add a violation of the Economic Espionage Act as a predicate act.

What Distinguishes the DTSA from the UTSA?

Because claims may still arise under states’ varied versions of the UTSA , it is important to highlight the important ways in which the DTSA differs from the UTSA.  Most notably, the DTSA opens the federal courts to plaintiffs in trade secrets cases.  The DTSA also allows for an ex parte seizure order.  A plaintiff concerned about the propagation or dissemination of its trade secrets would be able to take proactive steps to have the government seize misappropriated trade secrets prior to giving any notice of the lawsuit to the defendant.

Nevertheless, the ex parte seizure order is subject to important limitations that minimize interruption to the business operations of third parties, protect seized property from disclosure, and set a hearing date as soon as practicable.  As referenced above, the ex parte seizures are limited and may only be instituted in “extraordinary circumstances.”

The DTSA also contains no language preempting or displacing other causes of action that may arise under the same common nucleus of facts of a trade secret claim, unlike the UTSA as interpreted by some states which preempt such claims.

As also noted above, unlike the UTSA, the DTSA also provides protection to “whistleblowers who disclose trade secrets to law enforcement in confidence for the purpose of reporting or investigating a suspected violation of law,” and the “confidential disclosure of a trade secret in a lawsuit, including an anti-retaliation proceeding.”

Why Employers or Businesses Should Care and What They Should Do

Here are some tips and strategies we believe will assist employers and business owners in complying with and taking full advantage of the relief available under the DTSA:

  1. Update: Starting immediately, all non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following today must contain disclosures of the DTSA’s immunity provisions (either set forth directly in the agreement or in a policy that is cross-referenced in the agreement).  Employers who fail to provide these disclosures cannot recover exemplary damages or attorney fees in an action brought under the DTSA against an employee to whom no notice was provided.   Consequently, employers should immediately update their standard agreements to include the required disclosure language. Remember that employee is broadly defined under the DTSA to include contractor and consultant work done by an individual for an employer.
  2. Review: Have qualified counsel review policies and relevant agreements to ensure that they contain the required language noted above.  Additionally, ensure that your company is using non-disclosure agreements with your employees and that such agreements have clear definitions of trade secrets and confidential information and are not overly broad.
  3. Ensure and Protect: Do you have valuable information that could be protected as a trade secret? First, identify valuable sources of information in your organization. You should then check to see how your company protects such information. You will only be able to pursue trade secrets claims if you can show that your company employs reasonable secrecy measures to protect its trade secrets. Check out one of our recent webinars discussing best practices for the proper treatment of trade secret information. We have found that a trade secret audit with the assistance of counsel can be valuable for companies trying to identify and protect their trade secrets.
  4. Prepare: To protect your company’s trade secrets and avoid DTSA claims against your company, maintain proper on-boarding and off-boarding procedures and counsel your employees regarding the handling and further protection of your company’s confidential and trade secret information, including recurring employee training. Also closely monitor relationships with vendors and contractors who may have access to your company’s trade secrets and confidential information and ensure that there are appropriate protections in place.

It will be a brave new world with the passage of the DTSA. Federal courts will likely become the new forum for trade secret litigation. Make sure that your company is ready.

Further Information

Please visit our blog, Trading Secrets, for further coverage of the DTSA. We regularly update our page featuring DTSA developments, and we recently recorded a webinar and podcast featuring coverage of the DTSA updates (as of April 11, 2016).  We will also be hosting a webinar on Monday, May 16.  The webinar will describe the key features of the DTSA and compare its key provisions to the state Uniform Trade Secrets Act (“UTSA”) adopted in many states. The webinar will also provide practical tips and strategies concerning the pursuit and defense of trade secret cases in light of the DTSA, and provide some predictions concerning the future of trade secret litigation.

We are happy to discuss with you what the DTSA may mean for your company.

 

No Microscope Needed to See Why This Non-Compete Is Unenforceable

Posted in Non-Compete Enforceability, Restrictive Covenants

shutterstock_325101959When is a microscope not needed? When the problem one is looking at is big as an elephant, not small as an amoeba.

Nion, an electron microscope manufacturer, contracted with Gatan, a spectrometer manufacturer, to use Gatan’s spectrometers in Nion’s microscopes. The contract contained both confidentiality and non-compete clauses. When Gatan learned that Nion had sold other parties microscopes that used Nion’s own spectrometer, Gatan sued, claiming that Nion had breached the non-compete (but not the confidentiality) provision of the contract. In ruling on Nion’s motion to dismiss, the court found that the non-competition provision was void and that Gatan’s claim that the provision was necessary to protect its trade secrets was without merit. Gatan, Inc. v. Nion Company, 2016 WL 1243477 (N.D. Cal. Mar. 30, 2016).

Gatan proffered some interesting arguments in opposition to Nion’s motion (kind of like your mother said it was “interesting” when you cut your own hair at the age of 5 using some rusty scissors that you found in the neighbor’s yard). Though Gatan’s complaint captioned a trade secret claim, it never used the word “misappropriate” anywhere in its complaint. Gatan also asserted that the covenant not to compete in its contract with Nion protected Gatan’s trade secrets. But the non-compete covenant said nothing whatsoever about trade secrets.

In making its arguments, it appears that Gatan was shooting for the so-called “trade secrets exception” to California Business and Professions Code 16600 (prohibiting covenants not to compete), but unfortunately had somewhat of a misfire. Still, the court’s order contains some notable analysis.

First, the court acknowledges that there is a trade secret exception to California’s prohibition on covenants not to compete. As we have discussed in earlier blogs, here and here, California courts are split on whether there is a trade secret exception to BPC 16600. Some, like those cited in the Gatan order, believe that an exception exists. Others, like Ret. Grp. v. Galante, 176 Cal. App. 4th 1226 (2009), deny (in dicta) that such an exception does or even needs to exist. Unfortunately, the Gatan court did not advance this discussion.

So lesson #1 from Gatan: If one is going to invoke the “trade secrets exception” to BPC 16600, then the covenant not to compete better expressly make reference to the alleged “trade secrets.” Companies cannot, as Gatan did, simply point to a theoretical exception to the rule as a way to enforce what some would argue is a facially void clause. As the court wrote, “under any reading of the Agreement …, [the non-compete clause] cannot be considered ‘necessary’ to protect Gatan’s trade secrets”—the court found that the agreement’s separate confidential information provision sufficiently did this.

Second, Gatan cites to Golden v. California Emergency Physicians Med. Grp., 782 F.3d 1083 (9th Cir. 2015), for the proposition that BPC 16600 applies in the business-to-business context as much as in the employer-to-employee context, on the ground that the section “does not specifically target covenants not to compete between employees and their employers.” (See our blog on Golden here.) Other courts have held similarly. See, e.g., Jan Marini Skin Research, Inc. v. Allure Cosmetic USA, Inc., 2007 WL 1508686, at *13 (Cal. Ct. App. May 24, 2007), as modified on denial of reh’g (June 25, 2007) (unpublished) (“While many cases applying section 16600 arise in the context of an employer-employee relationship, the statute also applies to other contracts, such as manufacture or distributorship agreements between businesses or individuals.”); Richmond Techs., Inc. v. Aumtech Bus. Sols., 2011 WL 2607158, at *17 (N.D. Cal. July 1, 2011).

Perhaps time will tell if Golden and Gatan accurately predict the breadth of BPC 16600.  In the meantime, one thing appears clear: if one seeks to enforce a covenant not to compete on the basis that the covenant is needed to protect trade secrets, the covenant better at least mention the term “trade secrets” at least before Judge Hamilton in the Northern District of California.

Drones & Trade Secrets – How Low Can They Go?

Posted in Trade Secrets

shutterstock_230531929This Blog first addressed the threats drones pose to the protection of Trade Secrets in June of 2014.[1] Since then, drones continue to proliferate at a dizzying pace. Everybody and their brother has one, and drones are becoming much more sophisticated and advanced. [2]  The challenge is for the law to keep up with the technology, and so far, the law has not done a very good job.

In many ways, the challenge to protect trade secrets from drones is similar to the challenge to comply with legal data privacy obligations. In both situations, bad guys keep coming up with new ways to invade privacy and misappropriate secrets. The legal obligations remain generally the same, but the playing field keeps changing as technology advances.

For data privacy, there is no clear federal law,[3] but state laws frequently use language such as “reasonable security procedures and practices to protect the information from unauthorized access.”  For trade secrets, the legal standard is found in the Uniform Trade Secrets Act (UTSA) adopted by 48 states[4] and there should soon a federal version with the Defend Trade Secrets Act of 2016 (DTSA).[5]  The UTSA says two things relevant to drones. In order to be a trade secret, the information must not be publicly available, and a business must take reasonable steps to keep the information confidential.

Trade secrets are only protected as long as they remain secret. If a trade secret becomes known, it is like trying to push toothpaste back into the tube — you can’t do it. All you can do is seek legal recourse.  But in order to be successful in seeking such recourse, you must be able to show the information was not “publicly available” and you took “reasonable steps” to keep your secrets secret.

This leads us back to drones. In law school, we learned the common law principle of “ad coelum,” which says property rights extend vertically up and down.[6] Aviation changed upward vertical rights (a landowner’s rights no longer extend to the “heavens”), but it is still not clear where they stop.  In 1946, the U.S. Supreme Court declared airspace is now a “public highway,” but consistently flying noisy planes 83 feet above a chicken farm can be an unlawful taking of property.[7]  In 1970, the 5th Circuit held DuPont didn’t voluntarily disclose its trade secrets to someone spying via aerial photography on a methanol plant that was under construction.[8] It has been a long time since these two cases were decided, and there has been very little case law on these issues since then.  How relevant are these cases today in the age of modern drone technology when the standard for protecting trade secrets is “reasonable”?

Federal law remains unclear regarding the height at which a landowner can express exclusive dominion. Some have advocated that landowners should be allowed to exclude drones from airspace above their land up to a height of 500 feet.[9]  State laws are starting to come out and they naturally vary,[10] while states are taking a wait-and-see approach.  New legislation has been proposed to protect privacy rights,[11] and much has been written about Fourth Amendment ramifications and our “reasonable expectation of privacy,”[12] but how does this impact business owners and their trade secrets?  What can a business do to protect its trade secrets in an increasingly invasive drone age? Indeed what must a business do to protect its legal right to claim its confidential information is a trade secret at all.

And what if the drone is flying really low? What if the drone is just outside your office window? Does it matter if your office is ground level or on the 25th floor?

Rapidly advancing drone technology changes things for business owners. While satellites with sophisticated cameras can read the screen on a laptop while the user is sitting on a park bench, satellites with this capability are not in the hands of the typical business competitor — at least not yet — but drones are.

So what reasonable steps must businesses take to protect their trade secrets from drones?

As tempting as it may be,[13] shooting drones down is not a good option. Federal law makes it a crime to destroy a civil aircraft , and there are several reports of state and local criminal charges being filed against property owners who shot at drones like they were sporting clays.[14]

Signal jamming is one possibility.[15] The Secret Service started experimenting with this after a drone crashed on the White House lawn.[16]  However, this presents legal problems for private citizens since federal law prohibits using jamming equipment that interferes with cellular services, police radar, and GPS, and Wi-Fi.[17]

Geo Fencing is another option. Airports increased their research in this area after a drone recently collided with a passenger plane landing at Heathrow Airport outside London.[18] This technology prevents drones from flying over geographic locations by blocking the GPS coordinates.  But this only affects drones that need GPS equipment to operate. It won’t prevent someone from flying by line of sight.

Other technologies include sophisticated listening equipment able to detect and locate drones based on the sounds they make. Specialized radar technology is being tested that works differently from standard radar which has difficulty spotting slow-moving objects. Drone spoofing is a technology that involves sending fake GPS signals to the drone.  Hijacking (or “skyjacking”) drones involves taking over their navigational control systems. One company is even experimenting with security drones that are able to capture spy drones in nets that dangle from the security drones.[19] Drones armed with “net guns” were used during last year’s Boston Marathon to capture any drones violating an airspace ban along the race course.[20]

Basic window covering should also be examined. While many states have “Peeping Tom” laws that make it illegal to look in windows, their applicability to drones spying on places of business is largely untested.  In the new drone landscape, businesses should consider blocking all visibility through windows to interior spaces where confidential information exists and might be viewed with powerful new cameras — especially now that drones can bring those powerful new cameras even closer.

Finally, consider whether “good” drones should be used to proactively protect trade secrets, instead of just worrying about defending against “bad” drones controlled by competitors. Good drones could be effective enhancements to traditional surveillance systems already being used by businesses concerned about protecting their trade secrets.

Businesses must strike a balance between getting work done freely without restrictions and doing what is necessary to protect company secrets.  Make sure your next trade secret audit includes the exposures created by modern drone technology and reasonable countermeasures available to minimize such exposure, while also considering proactive ways drones might be used to enhance a business’ overall security.

[1] See “Josh Salinas Explains How Drones Could Pose a Threat to the Protection of Trade Secrets

[2] See, e.g., New announcements such as wearable cameras that can fly to take selfies, and the proliferation of indoor drones.

[3] There is no comprehensive federal law providing a uniform compliance standard for information security best practices.  U.S. businesses must comply with 47 different states’ laws governing such issues.

[4] The UTSA, published by the Uniform Law Commission (ULC) and amended in 1985, was recently adopted by Texas, which became the 48th state to enact some version of the UTSA. New York and Massachusetts are the only states that have not enacted the UTSA.

[5] Congress passed the Defend Trade Secrets Act of 2016 in April. The DTSA has strong bipartisan support, and President Obama has indicated he will sign it into law.

[6] Taken from the Latin Cuius est solum eius est usque ad coelum (et ad inferos) meaning “for whoever owns the soil, it is theirs up to Heaven (and down to Hell).”

[7] United States v. Causby, 328 U.S. 260 (1946).

[8] E.I. DuPont deNemours & Co. V. Christopher, 431 F.2d 1012 (5th Cir. 1970)

[9] Rule, T. A. (2015). Airspace in an Age of Drones. Boston University Law Review, 95(1), 155-208, at p. 159

[10] E.g., Nevada prohibits drones from flying less than 250 feet.

[11] E.g., Sen. Edward Markey (D-MA) is pushing legislation known as the Drone Aircraft Privacy and Transparency Act.

[12] See, e.g., Matiteyahu, Taly, (2015). Drone Regulations and Fourth Amendment Rights: The Interaction of State Drone Statutes and the Reasonable Expectation of Privacy, Columbia Journal of Law and Social Problems, 48, 265-308.

[13] The Colorado town of Deer Trail made national headlines when it called for a vote on issuing hunting licenses for drones.

[14] See, e.g., http://www.cnn.com/2015/09/09/opinions/schneier-shoot-down-drones/

[15] See, e.g., http://makezine.com/2015/10/16/research-company-takes-aim-uavs-portable-anti-drone-rifle/

[16] See http://www.popsci.com/secret-service-tries-jamming-drone-signals-near-white-house

[17] See https://www.fcc.gov/general/jammer-enforcement

[18] See https://www.theguardian.com/technology/2016/apr/18/drones-government-labour-ba-rules-drones-heathrow-incident

[19] See “Copping a ‘copter” in the May 2, 2015 issue of The Economist

[20] https://www.bostonglobe.com/metro/2015/04/21/boston-marathon-drone-detection-firm-brought-net-guns/2oSp9Brfn5rFOIYqRJmP3H/story.html

White House Issues A Call To Arms With Respect To Non-Competes

Posted in Legislation, Non-Compete Enforceability, Restrictive Covenants

shutterstock_348832949 (1)On May 5, 2016, the White House issued a report largely piggybacking on a recent U.S. Treasury Department study, on which we previously posted, with a primary focus on the purported misuse and negative impacts of non-compete agreements.  The White House report reiterated much of what the Treasury Department covered its March 31, 2016 study, and focused on how the White House will apparently begin to “facilitate discussion on non-compete agreements and their consequences.”

Indeed, on the same day that the White House issued its report, Vice President Joe Biden posted a lengthy message on his Facebook page, linking to a White House survey that encourages employees to share with the administration “how non-competes agreements or wage collusion are holding you down.”  The Vice President expressed concern in his post about “the improper use of non-compete agreements, where companies make workers promise when they are hired that if they leave the company, they can’t work for another company in the same industry,” and noted that “these agreements can create unnecessary roadblocks for any worker trying to get a raise, looking to move up the ladder by joining another employer, or even start their own company.”  He concluded by promising that “the President and I will continue to fight for the dignity and respect of hardworking Americans,” including “put[ting] forward a set of best practices and call to action for state legislators to make progress on reforms to address the misuse of non-competes.”

Like the U.S. Treasury Department, the authors of the White House report briefly acknowledge that, in some cases, non-compete agreements can play an important role in protecting businesses, promoting innovation, and encouraging greater employer investment in their workers.  They ultimately conclude, however, that the potential harm of misuse by employers, and effects on wages, labor market dynamism, innovation, entrepreneurship, and regional economic growth outweighs those benefits.  The authors further noted the “growing movement in states to take action to limit the misuse of non-compete agreements,” specifically highlighting that several states have taken steps to limit the scope and duration of non-compete agreements, noting for example Hawaii’s ban on non-compete agreements for technology jobs and New Mexico’s recent ban on non-compete agreements for health care jobs.

The authors go on to list seven areas in which they believe that workers may be disadvantaged by non-competes, and gives examples of how state legislatures are attempting to address the issues.  The issues include (1) compelling workers who are unlikely to possess trade secrets to sign non-competes, (2) having new employees sign a non-compete only after accepting a job offer, (3) not explaining the implications and enforceability of such agreements to employees, (4) drafting overly broad or unenforceable agreements,(5) requiring non-competes without consideration beyond continued employment, (6) restricting employees after they are fired without cause, and (7) the purported detrimental health and well-being effects by restricting consumer choice.

The authors note that in the ensuing months, the White House, the Treasury Department, and Department of Labor will convene a group of experts in labor law, economics, government and business to facilitate discussion on this matter.  “The goal will be to identify key areas where implementation and enforcement of non-competes may present issues, to examine promising practices in states, and put forward a set of best practices and call to action for state reform.”  They also stress that research must continue to assess and identify policy reforms and how such reforms will impact the non-compete world.  Lastly, the authors emphasize that ultimately the power of reform is in the hands of state legislators and policymakers to adopt institutional reforms that strike a balance between the appropriate use of non-competes and the protection of the workers subjected to them.