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Trading Secrets

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

Seyfarth’s Trade Secrets Group Earns Top Tier Ranking from Legal 500

Posted in Trade Secrets

Top_tier_firmsThe 2016 edition of The Legal 500 United States recommends Seyfarth Shaw’s Trade Secrets group as one of the best in the country. Nationally, for the first time, our Trade Secrets practice earned Top Tier.

Based on feedback from corporate counsel, two Seyfarth partners, Michael D. Wexler and Robert B. Milligan were recommended in the editorial.

The Legal 500 United States is an independent guide providing comprehensive coverage on legal services and is widely referenced for its definitive judgment of law firm capabilities. The Legal 500 United States Awards 2016 is a new concept in recognizing and rewarding the best in-house and private practice teams and individuals over the past 12 months. The awards are given to the elite legal practitioners, based on comprehensive research into the U.S. legal market.

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

Posted in Legislation, Trade Secrets

shutterstock_149599301We are pleased to announce the webinar “The Defend Trade Secrets Act: What Employers Should Know Now” is now available as a podcast and webinar recording.

In Seyfarth’s sixth installment, attorneys Robert Milligan, Daniel Hart and Amy Abeloff, described the key features of the Defend Trade Secrets Act (“DTSA”) and compared its key provisions to the state Uniform Trade Secrets Act (“UTSA”) adopted in many states. They also provided practical tips and strategies concerning the pursuit and defense of trade secret cases in light of the DTSA, the handling of employment relations, and provided some predictions concerning the future of trade secret litigation.

As a conclusion to this well-received webinar, we compiled a summary of three takeaways that were discussed during the webinar:

  • The DTSA was passed  after many failed attempts to pass trade secret legislation allowing for a federal cause of action for misappropriation. The bill was passed with overwhelming bipartisan, bicameral support, as well as backing from many significant companies in several business sectors.  The DTSA now allows trade secret owners to sue in federal court for trade secret misappropriation, and seek remedies heretofore unavailable, including an ex parte seizure order.
  • The DTSA contains an immunity provision that protects individuals from criminal or civil liability for disclosing a trade secret if such disclosure is made in confidence to a government official or attorney, indirectly or directly.  The provision applies to those reporting violations of law or who file lawsuits alleging employer retaliation for reporting a suspected violation of law, subject to certain specifications (i.e., trade secret information to be used in a retaliation case must be filed under seal). The DTSA places an affirmative duty on employers to give employees notice of this provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information” that is entered into or updated after May 11, 2016. Employers that do not comply with this requirement lose the ability to recoup exemplary damages or attorney fees in an action brought under the DTSA.
  • Though the passage of the DTSA creates a new federal cause of action for trade secret misappropriation, the passage does not render state law and state causes of action irrelevant or unimportant. The UTSA is still an available cause of action in 48 states, and state law still plays a vital role in drafting non-disclosure and non-competition agreements. Additionally, under the DTSA, employers may be able to seek injunctive relief against former employees in the event of misappropriation, but such injunctive restrictions must comport with relevant state law.

Join us Tuesday, June 21 at 12:00 p.m. Central, for our next webinar, “Enforcing Trade Secret and Non-Compete Provisions in Franchise Agreements.” To register, click here.

Court Upholds Non-Compete Giving Former Employer Discretion To Determine Whether Ex-Employee Is Working For A Competitor

Posted in Non-Compete Enforceability, Restrictive Covenants

shutterstock_208182985A severance agreement executed in connection with a Stark Truss employee’s resignation included a one-year non-competition clause.  It allowed the company unfettered discretion to decide if his new employer was a competitor and, if so, to terminate his severance.  The ex-employee took another job and sued Stark Truss in an Ohio court, seeking a declaration that he was entitled to 100% of his severance.  The trial court’s judgment for Stark Truss was affirmed on appeal.  Saunier v. Stark Truss Co., Case No. 2015CA00202 (Ohio App., May 23, 2016).

The parties.  Stark Truss is an Ohio manufacturer and distributor of wood and steel components used in building construction.  Saunier, a 35-year employee, was the company’s asset manager.  Immediately after his separation from Stark Truss, Saunier accepted a similar position, nearby, with Carter Lumber.

Stark Truss’ “sole discretion”.  Under the severance agreement, Start Truss had “sole discretion” to denominate Saunier’s subsequent employer a “Competitor.”  The definition of “Competitor” was a business located within 100 miles of Stark Truss and “substantially similar” to that company.  Saunier was required to provide the company with detailed information concerning his new employment.  If Saunier affiliated with a “Competitor” within one year from his separation date, he forfeited further severance payments.  Stark Truss determined that Carter Lumber was a “Competitor.”

Ruling on appeal.  The Court of Appeals noted that both parties were represented by counsel in negotiating the Severance Agreement.  Consistent with several Ohio judicial decisions involving a “sole discretion” contract provision in other contexts, the appellate tribunal determined that the clause was unambiguous and was valid.

The court did not address the issue of whether Stark Truss’ “sole discretion” was without limitations.  Perhaps the judges concluded that the company’s determination was within the bounds of sound judgment and, therefore, it was reasonable.  Nor did the judges say whether the same ruling would have been issued to a “sole discretion” provision in a traditional employment contract non-compete rather than a severance agreement.

Takeaways.  The Saunier appellate court held that, under the circumstances there, an employer may reserve to itself the unilateral right to decide whether an employee has violated a non-compete.  Is such “sole discretion” unqualified?  Probably not.

There are very few reported decisions mentioning, much less adjudicating, the limits of a “sole discretion” contract provision in a non-compete context.

  • One opinion that refers to a “sole discretion” provision within a non-compete agreement is SkyHawke Technologies LLC v. Unemployment Commission, 27 A.3d 1050, 1052-53 (Pa. Commonwealth Court 2011).  However, the court did not address the provision’s validity.  There, an individual had a contract to provide services to a company.  He was permitted to furnish similar services to others, but he could be fired if the company determined, in its “sole discretion,” that his performance of those similar services was not in its best interests.  The company apparently made such a determination and terminated the contract.  The litigation concerned (a) the individual’s claim that he had been an employee and was entitled to unemployment compensation, and (b) the company’s counter that he had been an independent contractor to whom no such compensation was owed.  The court ruled in favor of the company but without significant discussion of the “sole discretion” provision.
  • A case holding that “sole discretion” sometimes is unlimited is Sunshine Gas. Distributors, Inc. v. Biscayne Enterprises, Inc., 39 So.3d 978 (Fla. App. 2014).  Each party to a lease had “sole discretion” to decide whether or not to renew.  The jurists stated that imposing a duty of “good faith and fair dealing” with respect to a contract containing what they called a “binary choice” would frustrate, rather than protect, the parties’ interests.  39 So.3d at 980 n.1.
  • However, an older Florida Appellate Court decision, Cox v. CSX Intermodal, Inc., 732 So.2d 1092, 1097-98 (1979), explained when a “good faith and fair dealing” requirement should be imputed with respect to an exercise of “sole discretion.”  In the jurists’ view, if a “broad range of authority is reposed in one party” to a contract, “the reasonable expectations” of the parties may need to be protected from an arbitrary discretionary decision.  So, if the parties seem to have anticipated that community standards of honesty, decency and reasonableness would be applied, “good faith and fair dealing” is required.  Although the Cox lawsuit did not involve a non-compete, the same principles might well be applied to an employer exercising “sole discretion” to decide whether an ex- employee is engaging in prohibited competition.

 

Texas Supreme Court: Company Representative May Be Excluded from Trade Secret Hearing

Posted in Practice & Procedure, Trade Secrets

shutterstock_180803939In a clash between two major oil companies, the Texas Supreme Court ruled May 20, 2016 that the recently enacted Texas Uniform Trade Secrets Act (“TUTSA”) allows the trial court discretion to exclude a company representative from portions of a temporary injunction hearing involving trade secret information.  The Court further held a party has no absolute constitutional due-process right to have a designated representative present at the hearing.

A former employee of M-I L.L.C. (“M-I”), a Schlumberger subsidiary, left to work for National Oilfield Varco (NOV) in early 2014.  The employee then filed suit against NOV in April 2014, seeking a declaratory judgment on his non-compete agreement.  M-I counterclaimed for breach of contract and misappropriation of trade secrets and further sued NOV as a defendant.

At a temporary injunction where M-I sought to present evidence through oral testimony of its purported trade secrets, M-I asked the trial court to exclude from the courtroom NOV’s designated representative.  The trial court categorically denied this request, concluding that it would be a denial of due process to prohibit the representative from attending.  The Court of Appeals then denied M-I’s writ of mandamus.

The Texas Supreme Court held, however, that the trial court failed to conduct the necessary due-process analysis balancing NOV’s right to have its representative attend the hearing and  M-I’s right to protect its trade secrets from someone who could have been a competitive decision-maker at NOV.  Specifically, the Court held that the balancing test required the trial court to determine, e.g.,

  • the degree of competitive harm M-I would have suffered from the dissemination of its alleged trade secrets to NOV’s representative; and
  • the degree to which NOV’s defense of M-I’s claims would be impaired by the representative’s exclusion.

This analysis may ultimately result in permitting NOV’s representative to attend the hearing, the Court stated, but the failure of the trial court to conduct any such analysis constituted an abuse of discretion.

The Court further concluded that TUTSA allows a trial court to exclude a company representative from portions of the hearing where trade secrets are being discussed.  Specifically, the Court held the provision of the statute allowing for “in camera hearings” should be interpreted as proceedings where a party or its representatives may be excluded, such as the injunction hearing at issue. Tex. Civ. Prac. & Rem. Code §134A.006.  This interpretation, the Court concluded, was appropriate because “it best gives effect to [TUTSA’s] directive to take reasonable measures to protect trade secrets, and its express authorization for protective orders with provisions ‘limiting access to confidential information to only the attorneys and their experts.’”

Interestingly, the Court also noted that when conducting the balancing due-process test regarding NOV’s corporate representative, the trial court must consider that “even when acting in good faith, [the representative] could not resist acting on what he may learn.”  In support of this position, the Court cited to a federal case from the Court of Appeals for the D.C. Circuit which held that “it is very hard for the human mind to compartmentalize and selectively suppress information once learned, no matter how well-intentioned the effort may be to do so.”  FTC v. Exxon Corp., 636 F.2d 1336, 1350 (D.C. Cir. 1980).  This analysis appears to lend support to interpreting TUTSA to adopting in some form the “inevitable disclosure” doctrine, which has not been otherwise officially recognized in Texas.  This doctrine generally holds that a former employer is entitled to enjoin a former employee if the new employment would result in “inevitable disclosure” of confidential information.[1]

TUTSA became effective in Texas on September 1, 2013.

[1] See, e.g., Harell, Alex, Is Anything Inevitable?  The Impending Clash between the Inevitable Disclosure Doctrine and the Covenants Not to Compete Act, 76 Tex. B.J. 757 (2013).

Upcoming Webinar: Enforcing Trade Secret and Non-Compete Provisions in Franchise Agreements

Posted in Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants, Trade Secrets

WebinarOn Tuesday, June 21, 2016 at 12:00 p.m. Central, Seyfarth attorneys, John Skelton, James Yu and Dawn Mertineit will present the seventh installment of the 2016 Trade Secrets Webinar series. This program will focus on protecting a franchisor’s trade secrets, confidential information, and goodwill through the use of covenants against competition.

The Seyfarth panel will specifically address the following topics:

  • The scope of protectable interests (for both the Franchisor and the Franchisee) in the franchise relationship and with respect to the franchise operating system.
  • Enforcement considerations for the franchisee when onboarding and terminating employees and for the franchisor with respect to terminated or withdrawing franchisees.
  • State non-compete laws and legislation and other state specific nuances.
  • Enforcing in-term and post-term non-compete provisions in the franchise context.
  • Lessons to be learned from recent non-compete decisions.

Our panel of attorneys have significant experience advising franchise, dealer, and distributor clients on protecting their brands, trade secrets, and other intellectual property, including litigating trade secret cases, drafting protection agreements, and conducting trade secret audits.

*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.

register

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

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

shutterstock_149599301

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?

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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.

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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.