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Trading Secrets

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

Don’t Tweet On Me! Montana and Virginia Become Latest States to Pass Social Media Privacy Legislation

Posted in Legislation, Social Media

shutterstock_272870042By Adam Vergne and Chuck Walters

Following a national trend, Montana and Virginia have become the nineteenth and twentieth states to enact laws restricting employer access to the social media accounts of applicants and employees.[1]

Virginia’s law, which takes effect on July 1, 2015, prohibits requesting (or requiring) the disclosure of usernames and/or passwords to an individual’s social media account.  In addition, the law prohibits any requirement to change privacy settings or add a manager to the “friend” or contact list associated with a particular social media account.  In addition to prohibiting the disclosure of usernames and passwords, under Montana’s new law, which took effect April 23, 2015, an employer is prohibited from requiring the disclosure of any information associated with a social media account or requesting an employee or applicant access a social media account in the presence of the employer.  As is common with such legislation, both statutes contain an anti-retaliation provision that prohibits an employer from taking any adverse actions against individual that exercise his or her rights under the law.

Notably, these statutes apply only to personal social media accounts meaning accounts opened on behalf or at the request of the employer are not protected. Employers are also still free to view information contained in personal social media accounts that is publically available.  Virginia’s law also includes an exception that permits employers to request login information if the employer has a “reasonable belief” the account is “relevant” to a “formal investigation or related proceeding” concerning the violation of a federal, state, or local law.

As the legal landscape associated with social media accounts continues to evolve, employers should review their policies and procedures to ensure compliance with all relevant statutory provisions.

[1] In 2012, Maryland became the first state to enact social media privacy legislation.  Since that time, Arkansas, California, Colorado, Illinois, Louisiana, Michigan, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, Rhode Island, Tennessee, Utah, Washington, and Wisconsin have enacted similar legislation.

Court, Applying Pennsylvania And California Law, Declines To Enjoin Alleged Violation Of Worldwide Non-Compete

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

A non-competition covenant prohibited employees of Adhesives Research (AR), a company based in Pennsylvania, from performshutterstock_129702905ing services for a competitor of AR anywhere in the world for two years after termination. Newsom, AR’s western U.S. manager of medical products, worked out of her home in California. When she quit and joined another adhesives manufacturer, AR sued and moved for entry of a preliminary injunction. The court denied the motion.

Status of the case. The covenant contained a Pennsylvania choice of law provision and mandated that litigation be filed in that state. Responding to the motion, Newsom argued that Pennsylvania law was inapplicable and asserted that California law applied. It is less friendly to employers. The court concluded that the worldwide geographic scope was overbroad under both states’ legal principles, that blue penciling was impermissible because of AR’s unclean hands in attempting to enforce an oppressive covenant, and that in any event the new employer did not compete with AR. Adhesives Research, Inc. v. Newsom, Civ. No. 1:15-CV-0326 (M.D. Pa., Apr. 13, 2015) (Caldwell, J.).

The parties. AR makes adhesives used in medical, pharmaceutical, electronics, and other industries. Its headquarters are in Glen Rock, PA, but it sells adhesives all over the world. They are purchased as raw materials and used by customers in making their final products. Except for a few days each year spent at corporate headquarters for meetings and training, Newsom worked from home but communicated frequently with AR in Glen Rock.

The non-compete. In 2012, AR required all of its employees, including Newsom, to sign a non-compete agreement. It prohibited performance of:

“any services similar to the services performed by [the employee] during his employment with [AR], for . . . any business . . . that develops, manufactures or sells any products that compete in kind with . . . any products manufactured, sold or under development by [AR] . . . in any area of the world in which such products are sold by [AR].”

The agreement, which contained a Pennsylvania choice of law provision, included a consent to litigation exclusively in a federal or state court in Pennsylvania and a waiver of a claim or defense that the forum was inconvenient.

Newsom’s resignation from AR, and her new employment. Newsom resigned from AR and went to work for Scapa Tapes, a manufacturer of bonding and adhesive products, as a sales executive for the western United States. Unlike AR, Scapa does not sell raw adhesives. Rather, it uses the adhesives in making the other products it sells.
Unenforceability under California and Pennsylvania law. Newsom maintained that California law controls the non-compete covenant as against her even though it specifies application of Pennsylvania law. Without deciding, Judge Caldwell concluded that the covenant is unenforceable under either state’s laws.

California. A California statute provides that, with exceptions not applicable here, contractual employee non-compete clauses are void.

Pennsylvania. Courts in Pennsylvania require that restrictions in an employment agreement’s non-competition clause must be “roughly consonant” with the employee’s duties and must not be unduly burdensome. According to Judge Caldwell, a worldwide ban on Newsom’s employment by an AR competitor “is not limited to an area reasonably necessary to protect” AR. He also held that the ban results in a severe hardship to her. Moreover, he concluded that AR had engaged in oppressive overreaching by applying an unlimited geographic scope to an employee whose territory only included one-half of this country, and he ruled that AR had unclean hands. Although Pennsylvania permits blue penciling of unreasonably broad contractual restrictions in some circumstances, the judge stated that AR’s unclean hands here preclude the exercise of such judicial discretion in its favor.

The non-competition clause. Judge Caldwell held that AR and Scapia are not competitors. AR manufactures adhesive rolls which it sells to customers for use in their products. By contrast, Scapia does not sell adhesive rolls but, rather, makes and sells goods which contain adhesives. He ruled that the restraint against working for a company that manufactures or sells “any products that compete in kind” with AR’s products is overbroad because no prudent prospective employer engaged in a business even remotely similar to AR’s would take a chance on hiring a former AR employee.

Takeaways. Employers with workers in more than a single state, who are required to sign a one-size-fits-all non-compete, non-solicitation and/or confidentiality template, run a significant risk that it will not be enforceable in at least some jurisdictions. In addition, inclusion of provisions more protective than necessary jeopardize enforceability. For help in drafting enforceable restrictive employment covenants, consult an experienced trade secrets attorney.

Employee Social Networking: Protecting Your Trade Secrets in Social Media Webinar

Posted in Restrictive Covenants, Social Media, Trade Secrets

WebinarOn Thursday, May 28, 2015 at 12:00 p.m. Central, in the fourth installment of our 2015 Trade Secret Webinars, Seyfarth attorneys John Tomaszewski, Eric Barton and Joshua Salinas will address the relationship between trade secrets, social media, and privacy.

The Seyfarth panel will specifically address the following topics:

  • Defining, understanding, and protecting trade secrets in social media, including a deeper dive into how courts are interpreting ownership of social media accounts and whether social media sites constitute property and preventing trade secret misappropriation or distribution through social media channels.
  • Discussing the National Labor Relations Board’s treatment of employer social media policies, whether it applies to you, and what steps should be taken to avoid potential penalties for violating NLRB rulings.
  • Analyzing judicial treatment of ownership of social media handles, pages, and accounts, and how developing internal company policy and/or contracts can obviate expensive litigation.
  • Discussion and analysis of recent and proposed employee privacy legislation, and how it may impact policies dictating mandatory turnover of social networking passwords and employee privacy concerns.
  • Addressing cyberbullying in social media by employees, particularly where there is a disclosure of trade secrets or confidential information.

register

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

Registration: there is no cost to attend this program, however, registration is required.

*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.

Satisfying the Computer Fraud and Abuse Act’s Jurisdictional Requirements Can Be Complicated

Posted in Computer Fraud, Computer Fraud and Abuse Act, Cybersecurity, Data Theft

shutterstock_176119643The parties in a Computer Fraud and Abuse Act case moved for partial summary judgment. Among the issues were whether the plaintiff had incurred the requisite $5,000 in qualifying losses, and whether the complaint was time-barred. The motions were denied, but the court had to do a lot of explaining. Quantlab Technologies Ltd. v. Godlevsky, Case No. 4:09-CV-4039 (S.D.Tex., Apr. 14, 2015) (Ellison, J.).

Status of the case. Judge Ellison ruled that the CFAA damages threshold was met. He held that (a) the value of time spent in an internal investigation could be aggregated with (b) sums paid to two consultants to investigate the intrusions and to assist in the prosecution of resulting litigation. He also decided that the statute of limitations began to run when the plaintiff first learned of the supposed CFAA violations, even though the identity of the perpetrator was unknown. And he ruled that claims against an individual whose alleged wrongdoing was mentioned in the body of the initial CFAA count filed in 2009, but who was not named as a defendant in that count until a third amended complaint was filed in 2014, related back to the 2009 filing.

The alleged violations. Quantlab is a financial research firm that claimed to have valuable trade secrets relating to high frequency stock trading programs. In September 2007, six months after the company terminated its employee Kuharsky, Quantlab discovered that its computer network apparently had been accessed without authorization on four separate occasions between March and August 2007. An internal probe indicated that he was the culprit.

Additional investigation prior to filing the complaint, In 2008, Quantlab retained network security consulting firm Grey Hat to ascertain whether Kuharsky could gain future unauthorized access. No conclusions were reached. Later, Quantlab concluded that he had not accessed the company’s files after all. Rather, it was his friend Andreev, a Quantlab employee, who acted at Kuharsky’s behest and used Kuharsky’s home computer.

The pleadings. Quantlab’s original CFAA count named Kuharsky as a defendant. Quantlab employee Maravina was not named as a defendant, but she was described as a “sleeper mole” who had assisted Kuharsky in stealing trade secrets and confidential information. She was added as a CFAA defendant in the third amended complaint.

Calculating qualifying losses.

  1. Qualifying losses relating to Kuharsky. Quantlab calculated that its internal investigation in 2007 took 10-12 hours and cost the company $2,500-3,000. That sum was not enough, however, to satisfy the $5,000 requirement for bringing a CFAA lawsuit. Gray Hat billed the company $13,400 in 2008 for consulting services, but Kuharsky contended that those services did not include investigation of the supposed computer incursion. The court accepted as true the sworn declaration of Quantlab’s CEO that Gray Hat was hired in response to Kuharsky’s actions. Thus, the requisite qualifying loss total was deemed established.
  2. Qualifying losses relating to Maravina. After the complaint was filed, Quantlab hired consulting firm Pathway Forensics and asserted that payment of its $31,900 bill constituted qualifying losses. Maravina insisted that Pathway’s assignments concerned litigation, not investigating her role in the 2007 events. Quantlab maintained, however, that the lawsuit work was not included in that bill. The court concluded that since Pathway may have contributed to Quantlab’s 2014 decision to add Maravina as a defendant, $5,000 in damages was demonstrated. The court said it was unnecessary to rule on the question of whether all expenses incurred investigating several persons’ intrusions can be used in computing the amount of losses attributable to each person’s involvement.

Statute of limitations.

  1. Kuharsky. Quantlab moved for summary judgment against Kuharsky. He asserted that the two-year statute of limitations began to run in September 2007. Quantlab argued that it had two years from early 2008 when the company first learned that Andreev, not Kuharsky, had accessed the network. The court said that the motion could not be granted because no evidence had been presented regarding the material question of whether Andreev was authorized to access the network from Kuharsky’s home.
  2. Maravina. Seven years elapsed between the intrusions in 2007 and the first time Maravina was named as a CFAA defendant. She asserted a statute of limitations defense. The court reiterated that the original CFAA count called her a “sleeper mole” and said she was “on notice that the lawsuit concerned the same conduct that now underpins the CFAA claim against her.” So, that claim was held to relate back to the 2009 litigation commencement date. Although not mentioned in its recent ruling, an earlier written decision on other motions in the same case stated that she was a named defendant (but not in the CFAA count) in the original complaint, and the court added that she was Kuharsky’s wife.

Takeaways. CFAA litigation can be very complex. For example, judges have not consistently ruled on the two primary issues involved in Quantlab: (a) the meaning of the statutory requirement of a “loss . . . of at least $5,000,” and (b) the date the statute of limitations regarding a CFAA violation begins to run. Moreover, judicial interpretations of the statutory phrases “without authorization” and “exceeding authorized access” as they relate to prohibited contact with a computer network are sharply divided. Some courts hold that those phrases refer only to hacking by an outsider. Other jurists say the statute also is directed at persons who make unauthorized use of their employer’s computer. Both a prospective plaintiff considering filing a CFAA claim, and a defendant who is or may be named, should consult experienced counsel.

Webinar Recap! International Trade Secret and Non-Compete Law Update

Posted in Data Theft, International, Non-Compete Enforceability, Trade Secrets

shutterstock_183065225We are pleased to announce the webinar “International Trade Secret and Non-Compete Law Update” is now available as a podcast and webinar recording.

In Seyfarth’s third installment of its 2015 Trade Secrets Webinar series, Seyfarth attorneys focused on non-compete and trade secret considerations from an international perspective. Specifically, the webinar will involved a discussion of non-compete and trade secret issues in Europe and China compared to the United States. This webinar provided valuable insight for companies who compete in the global economy and must navigate the legal landscape in these countries to ensure protection of their trade secrets and confidential information, including the effective use of non-compete and non-disclosure agreements

As a conclusion to this well-received webinar, we compiled a list of key takeaway points, which are listed below.

International…local law compliance is key

One size does not fit all! Requirements for enforceable restrictive covenants vary dramatically from jurisdiction to jurisdiction. However, there are some common requirements and issues regarding enforceability based on the region (e.g. in Europe, see below). Bearing in mind non-compete covenants across the world may be unlawful in certain countries or heavily restricted, employers should carefully tailor agreements to satisfy local legal requirements and appropriately apply local drafting nuances to aid enforceability of any restrictive covenants.

The general approach to restrictive covenants in Europe, is that the restrictions should not go further than is reasonably necessary to protect the employer’s legitimate business interests. This restrictive approach is a continuing trend across Europe. For example, there is a recent prohibition in the Netherlands on non-compete clauses in fixed-term contract unless justified by the special interests of the company. In practice, this means that employers should particularly focus on the duration and scope (in terms of geographical coverage and the employee’s own personal activities) of the restrictions and be mindful of any local payment obligations when preparing restrictive covenants (e.g. in France and Germany). Europe is also making an attempt to remedy the uneven levels of protection and remedies in relation to trade secrets. The draft EU Directive for trade secret protection is currently making its way through the legislative process with no firm timeline for adoption.

In addition to local or regional nuances, employers should take advantage of other contractual and/or tactical mechanisms as a “belt-and braces” approach, such as, claw-backs and forfeiture of deferred compensation (where permitted), use of garden leave provisions, and strategic use of forum selection and choice-of-law provisions. Employers operating in the U.S. should also consider strategic use of mandatory forum selection and choice-of-law provisions in restrictive covenant agreements with U.S.-based employees.

Practical measures should also be taken to protect confidential information and trade secrets, including limiting access to sensitive information, using exit interviews, and (provided that applicable privacy laws are followed) monitoring use of company IT resources and conducting forensic investigations of departing employees’ computer devices.

France…do not miss the deadline

Drafting a non-compete clause under French labor law requires specific care as Courts are particularly critical of the following: duration, the geographical and activities scope, the conditions in which the employer releases the employee from such obligation, the employee’s role, the interests of the company and the financial compensation provided by the clause.

Recent case law shows that French Courts are strict when it comes to the interpretation of the non-compete clauses and the possibility to waive the non-compete clause. If an employer misses the relevant contractual deadline to release an employee from their non-compete, the financial compensation will be due for the entire period. Similarly, if the employer waives the non-compete prematurely, the Courts will consider the waiver as invalid.

During employment an employee is subject to a general obligation of confidentiality and breach may be subject to civil and criminal sanctions. Only “trade secrets”, however, are protected post-termination under certain circumstances. Employers should therefore automatically include a confidentiality clause in employment agreements to strengthen the protection of the company’s data post-termination. Good news for employers, the French High Court recently confirmed that, unlike non-compete covenants, a confidentiality clause does not require any financial compensation.

United Kingdom…less is NOT more

Restrictive covenants are potentially void as an unlawful restraint of trade! In practical terms, this means that such covenants are only likely to be enforceable where they are fairly short in duration, the restriction is narrowly focused on the employee’s own personal activities (e.g. by geographical scope) and is specific to the commercial environment. Unlike in some European jurisdictions, payment will not ‘rescue’ an unenforceable restriction. In addition, the English Courts tend to have an unforgiving nature when it comes to poor drafting even if the intention of the parties is obvious. Employers should therefore also consider other creative and acceptable ways to aid enforceability, such as, deferring remuneration and varying and reaffirming covenants.

Absent any agreement, only “trade secrets”, which is narrowly defined, will be protected after employment. Employers should therefore ensure that employment contracts and/or other free-standing binding agreements provide full coverage for the protection of confidential and other valuable business information post-termination. Often the physical protection of confidential information is underestimated (e.g. encrypting data, installing passwords, secure storage, etc.), which can be a more effective and a less costly approach for employers in the long-term. Employers should therefore also seek to retain physical control of such information in order to reduce and limit unwanted disclosure and misuse.

China …. stay atop an evolving regulatory system

In China, employers should ensure that they have a non-compete agreement with the employee at the time of employment, so that the employer can decide whether to enforce or not to enforce the non-compete agreement for a period of post-employment.

In addition, employers should ensure that documents are marked with ‘confidential’, or that other measures are taken to protect confidential information.  Otherwise, remedies may not be available under the Chinese law for breach of confidential obligations.  Employers should also review and update rules and policies regarding confidentiality and security arrangements. Pre-employment vetting of R&D staff is also essential to prevent unexpected breach or non-compliance with trade secret and IP rights.

As a notable (and relatively recent) development, Injunctive relief for trade secret infringement is available in Shanghai and Anhui.

Aggressive SEC Enforcement Efforts Regarding Confidentiality Agreements Will Continue

Posted in Practice & Procedure, Restrictive Covenants

shutterstock_263632130By Ada W. Dolph

In a post-script to the SEC’s April 1 cease and desist order penalizing KBR, Inc. for a confidentiality statement that failed to carve out protected federal whistleblower complaints (our alert on it here), SEC Office of the Whistleblower Chief Sean McKessy today made additional comments that suggest public companies as well as private companies that contract with public companies should immediately review their agreements for compliance.

In a webinar sponsored by the American Bar Association titled “New Developments in Whistleblower Claims and the SEC,” McKessy commented on the recent KBR Order. Here are the key takeaways:

SEC Rule 21F-17 is “Very Broad

McKessy stated that he views the SEC Rule 21F-17 as “very broad,” and “intentionally so.” The Rule provides in relevant part:

(a)       No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.

McKessy said that he reads the Rule as stating that “no person shall take any action” to impede an individual from communicating directly with the SEC.

Agreement Review a Continued High Priority for the SEC

McKessy stated that this initiative remains a “priority” for him and his office. “To the extent that we have come across this language [restricting whistleblowers] in a Code of Conduct” or other agreements, the SEC has taken the position that it “falls within our jurisdiction and we have the ability to enforce it.”

He noted that “KBR is a concrete case to demonstrate what I have been saying,” referencing public remarks he has made in the past regarding SEC scrutiny of employment agreements. He stated that the agency is continuing to take affirmative steps to identify agreements that violate the Rule, including soliciting individuals to provide agreements for the SEC to review. Additionally, he reported that the SEC is reviewing executive severance agreements filed with Forms 8-K for any potential violations of the Rule.

The KBR Language is Not a “Safe Harbor”

When asked whether the language required as part of the KBR Order constituted a “safe harbor,” McKessy stated that he would “not go that far,” and that each agreement will be viewed in context. He described the language in the KBR Order as “certainly instructive” but “not restrictive” and not insulating a company from further scrutiny by the SEC. He also stated that it is “really not appropriate for me to bless any language,” and suggested that the same language could be acceptable in one context but not in another depending on the company’s approach to encouraging employees to come forward to report alleged securities fraud.

KBR Could Be Applied to Private Companies

McKessy was also asked whether the SEC would apply the KBR Order to private companies under the U.S. Supreme Court’s 2014 ruling in Lawson v. FMR LLC, 134 S.Ct. 1158 (2014), which expanded Sarbanes-Oxley’s whistleblower protections to employees of private companies who contract with public companies.

McKessy stated that the SEC has not officially taken a position on this issue, but in his personal opinion he can “certainly can see a logical thread behind the logic of the Lawson decision” to be “expanded into this space [private companies],” and that “anyone who has read the Lawson decision can extrapolate from it the broader application.”

SEC Not Bound By Agreements Precluding Production of Company Documents

McKessy was asked regarding the SEC’s position regarding the disclosure of company documents by whistleblowers in their complaints to the agency. He said that it will “surprise no one that companies have a 100% record” of preferring that company documents not be provided to the SEC. But, “[a]t the end of the day” he stated that any kind of agreement restricting an employee from providing company documents to the SEC is not enforceable against the SEC and companies should not “bank on the fact” that the SEC would “feel bound” by that agreement in any way.

McKessy took a more measured approach with regard to privileged company documents, however. McKessy stated that the SEC is “not interested in getting privileged information” and that the SEC discourages whistleblowers and their counsel from providing privileged information as part of their complaints. He noted that while there are “certain exceptions to privilege,” he would “hate to leave the impression that [the agency] is looking to create to create an army of lawyers who can ignore their confidentiality requirements because of the possibility of being paid under our [Dodd-Frank bounty] program.”

Next Steps for Companies

McKessy concluded his remarks on this issue by stating that “[t]his is the time for the company to take a look at standard, standing severance and confidentiality agreements.”

In short, it is clear that we can expect further SEC enforcement actions in this area. Public companies and private companies that contract with public companies should consult with counsel to review their employment agreements to be sure they will not be the next to be caught in the SEC’s crosshairs.

Ada W. Dolph is Team Co-Lead of the National Whistleblower Team. If you would like further information on this topic, please contact a member of the Whistleblower Team, your Seyfarth attorney or Ada W. Dolph at adolph@seyfarth.com.

Forum Selection Clause in Non-Compete Agreement Unenforceable

Posted in Non-Compete Enforceability, Practice & Procedure

shutterstock_87257554A contractual provision designating the exclusive venue for filing a breach of contract lawsuit was held to be trumped by a 100-year old statute requiring trial of such cases in the county of residence of at least one party. A&D Environmental Services, Inc. v. Miller, Case No. COA14-913 (N.C. App., Apr. 7, 2015).

Summary of the case. A North Carolina statute provides that, absent other applicable law, contract litigation “must be tried in the county in which” one or more plaintiffs or defendants reside when the complaint is filed. The parties’ employment agreement relevant to this litigation included a non-compete, not-solicit, and confidentiality provision, and a forum selection clause which stated that any complaint concerning the agreement “shall be brought exclusively in Mecklenburg County, North Carolina” (most likely Charlotte). The employer was headquartered in Guilford County (Greensboro, which is 90 miles from Charlotte). The employee, a resident of Orange County (not far from Greensboro), resigned, went to work for a competitor, and was sued in Guilford County. He moved to dismiss for lack of venue. His motion was denied, and the ruling was affirmed on appeal.

The Appellate Court’s Holding. There was no evidence that either party resided in Mecklenburg County, the contractually designated “exclusive” venue. Relying on the statute, as well as a 1921 North Carolina Supreme Court decision (Gaither v. Charlotte Motor Car Co., 182 N.C. 498, 109 S.E. 362) applying the statute in a factually similar lawsuit, the appellate tribunal held that venue in Guilford County was proper. The reasonableness of the statute as applied to the facts was not addressed.

Takeaways. At one time long ago, most courts invalidated forum selection clauses on the ground that the parties have no right to dictate where their disputes may be adjudicated (particularly if the legislature had addressed the issue). Today, the North Carolina statute and courts in a few other states perpetuate that philosophy.

However, a 1972 U.S. Supreme Court decision (The Bremen v. Zapata Off-Shore Co., 407 U.S. 1) criticized such thinking in part because forum selection clauses often provide consistency and certainty. Thereafter, many judges have held that such clauses must be analyzed on a case-by-case basis. When drafting — or being asked to agree to — a forum selection clause, keep the following factors in mind since they may determine whether it will be enforced:

  • whether the clause identifies the only court or courts where the controversy is to be heard or simply refers to a permissible adjudicatory forum,
  • whether the contract was procured by fraud or duress, and whether the choice of venue is reasonable,
  • whether the selected forum has subject matter jurisdiction (for instance, a clause naming a specific federal court will not be enforced in the absence of diversity of citizenship and the jurisdictional amount in controversy, or a federal question),
  • whether there is a nexus between the facts underlying the dispute and the location of the contractually designated adjudicator,
  • whether the relief requested by the plaintiff is at odds with fundamental policies of either the state of the forum or of the selected venue, and
  • whether comity is impacted (for example, if the contractual venue is in another country and was a reasonable selection when the contract was signed, the decision-maker may be inclined to enforce the clause, other things being equal).

 

Ninth Circuit Jeopardizes Broad “No Re-Hire” Clauses in California

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

shutterstock_118297453In Golden v. California Emergency Physicians Medical Group, a divided Ninth Circuit panel held that a “no re-hire” provision in a settlement agreement could, under certain circumstances, constitute an unlawful restraint of trade under California law.

The Facts

Dr. Golden, a physician, agreed to settle his discrimination claim against his employer, California Emergency Physicians Medical Group (“CEP”). Their oral settlement agreement, later reduced to writing, had Dr. Golden “waive any and all rights to employment with CEP or at any facility that CEP may own or with which it may contract in the future.” The district court enforced the parties’ settlement over Dr. Golden’s objection that this “no-rehire” clause violated Section 16600 of California’s Business & Professions Code, which provides that a contract is void if it restrains anyone from engaging in a lawful profession.

The Appellate Court Decision

On appeal, Dr. Golden argued that the “no re-hire” clause was unlawful and that, because it constituted a material term of the settlement, the entire agreement was void, permitting Dr. Golden to pursue his discrimination lawsuit.

The Ninth Circuit panel determined that Dr. Golden might prevail on this argument, and remanded the case to the district court for further proceedings. The panel first found that the validity of the “no re-hire” clause was ripe for determination. The dispute was ripe not because CEP was currently seeking to enforce the “no re-hire” clause against Dr. Golden (it was not), but because Dr. Golden sought to have the settlement agreement voided after his former attorney attempted to enforce the agreement in order to collect attorney’s fees. The panel reasoned that “when a litigant resists his adversary’s attempt to enforce a contract against him, the dispute has already completely materialized.”

The Ninth Circuit panel next addressed the validity of the “no re-hire” clause. Historically, this type of clause, which commonly appears in settlement agreements, has not been viewed as a non-compete clauses, in that a “no re-hire” clause does not keep a former employee from working for a competitor—just the former employer. The Golden court, however, took a wider view of Section 16600, reasoning that it applies to any contractual provision that “ ‘restrain[s anyone] from engaging in a lawful profession, trade, or business of any kind’ … extend[ing] to any ‘restraint of a substantial character,’ no matter its form or scope.”

To support this broad interpretation, the Ninth Circuit panel majority cited Section 16600’s language, statutory context, and case law to reason that Section 16600 applies to any contractual limitation that restricts the ability to practice a vocation. See, e.g., Edwards v. Arthur Andersen LLP, 189 P.3d 285 (Cal. 2008); City of Oakland v. Hassey, 163 Cal. App. 4th 1447 (2008). The panel majority noted that both Edwards and Hassey focused on the text of the law—whether the contested clause restrained someone from engaging in a trade, business, or profession—and not specifically whether the clause prevented competition with the former employer. The panel majority concluded that a clause creating a restraint of “substantial character” that could limit an employee’s opportunity to engage in a chosen line of work would fall under Section 16600’s “considerable breadth.”

Of significance is that the Ninth Circuit panel did not rule that the clause was actually void. Instead, the panel majority concluded that the district court would need to do more fact-finding to see if the clause actually created a restraint of a “substantial character” on Golden’s pursuit of his profession.

It also is significant that the Ninth Circuit panel majority—mindful that the California Supreme Court itself has not ruled on whether Section 16600 extends beyond traditional non-compete clauses in employment agreements—was merely predicting how it thought the California Supreme Court would rule.

A sharp dissent by Judge Kozinski expressed skepticism that the California Supreme Court would reach the same result as the panel majority, and argued that the settlement agreement should be enforced because the provision put no limits on Dr. Golden’s current ability to pursue his profession.

What Is the Golden Rule for California Employers?

Golden furnishes no clear guidance as to the continued viability of “no re-hire” clauses in California settlement agreements, for it is unclear how courts will apply the “substantial character” standard. However, it can be expected that plaintiffs’ lawyers will closely scrutinize “no-rehire” clauses and that this is even more likely if a clause applies beyond the employee’s prior employer to, for example, subsidiaries and affiliates of the employer, or if the employer commands a substantial share of the relevant labor market. But more limited “no re-hire” clauses, for most employers, would not seem to create any restraint that one could reasonably consider to be of “substantial character.” And most cases, unlike Golden, would not raise the validity of a “no re-hire” clause until there actually is an issue of re-hire—an issue that often never arises as a practical matter. Nonetheless, until the California Supreme Court weighs in, California employers should consider the Ninth’s Circuit’s decision when drafting settlement agreements that contain “no re-hire” clauses.

SEC Cracks Down On Confidentiality Agreements Chilling Employees’ Rights to Report Potential Securities Law Violations

Posted in Data Theft, Trade Secrets

shutterstock_155289302By Ada Dolph, Christopher Robertson, and Robert Milligan

The Securities and Exchange Commission (SEC) announced today that it had made good on its prior promises to take a hard look at employment agreements and policies that could be viewed as attempting to keep securities fraud complaints in-house. In KBR, Inc., Exchange Act Release No. 74619 (April 1, 2015), the agency announced an enforcement action and settlement with KBR in which KBR agreed to amend its Confidentiality Statement to provide further disclosures to employees regarding their right to communicate directly with government agencies, notify KBR employees who had signed the Statement in the past, and pay a $130,000 civil penalty.

The SEC concluded that KBR’s Confidentiality Statement violated SEC Rule 21F-17, adopted by the SEC after the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010. SEC Rule 21F-17 provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

According to the SEC Order, under its compliance program, KBR required that employees who were interviewed as part of the company’s internal investigations into internal reports of potential illegal or unethical conduct, including potential securities violations, sign a Confidentiality Statement at the start of any company interview. The KBR Confidentiality Statement provided in part:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC found that although it was not aware of any instance in which a KBR employee was actually prevented from communicating directly with the SEC, the Confidentiality Statement “impedes such communications by prohibiting employees from discussing the substance of their interview without clearance from KBR’s law department under penalty of disciplinary action including termination of employment,” thereby undermining the purpose of Rule 21F to “encourage[] individuals to report to the Commission.”

As part of the enforcement action, KBR agreed to amend its Confidentiality Statement to include this provision:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

Additionally, KBR agreed to contact KBR employees who signed the Confidentiality Statement from August 21, 2011 to the present informing them of the SEC Order and including a statement that they need not seek permission from KBR’s General Counsel before communicating with any governmental agency. The SEC also assessed a civil penalty of $130,000.

In a press release announcing the decision, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, is quoted as saying: “KBR changed its agreements to make clear that its current and former employees will not have to fear termination or retribution or seek approval from company lawyers before contacting us. . . . Other employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.”

This appears to be the next step in the SEC Whistleblower Division’s initiative to crack down on agreements that it views as violating SEC Rule 21F-17. In widely reported remarks before the Georgetown University Law Center Corporate Counsel Institute last spring, McKessy indicated that the agency was “actively looking for examples of confidentiality agreements, separation agreements, employee agreements that . . . in substance say ‘as a prerequisite to get this benefit you agree you’re not going to come to the commission or you’re not going to report anything to a regulator.’” And just this past February, it was reported that the SEC had delivered official letters to several companies seeking several years’ worth of their employee agreements, including nondisclosure and separation agreements.

In recent months, we have seen similar actions regarding agreements or policies by the Equal Employment Opportunity Commission (EEOC) and the National Labor Relations Board. Employers should review their existing employment policies and employment agreements, including confidentiality, non-disclosure and separation agreements, for any provisions that might go astray of these agency enforcement initiatives. As part of this enforcement action, the SEC found that the amended language cited above was acceptable in the employer’s Confidentiality Statement. Employers should consider including this language or similar language in their agreements and policies specifying that the reporting of potential violations law or regulations to government agencies is not prohibited, and indicating that no prior employer approval is required.

Given this enforcement action by the SEC, it may be just a matter of time before the SEC also weighs in on whether employers can prohibit employees from taking and disclosing company documents in connection with their alleged whistleblowing activities. See our prior blogs on this issue here and here, and one of the more recent controversial administrative decisions addressing this issue here.

Ada W. Dolph and Christopher F. Robertson are Team Co-Leads of the National Whistleblower Team. Robert B. Milligan is Co-Chair of the National Trade Secrets, Computer Fraud & Non-Competes practice group. If you would like further information on this topic, please contact a member of the Whistleblower Team, your Seyfarth attorney, Ada W. Dolph at adolph@seyfarth.com, Christopher F. Robertson at crobertson@seyfarth.com or Robert B. Milligan at rmilligan@seyfarth.com.

Webinar Recap! Protecting Confidential Information and Client Relationships in the Financial Services Industry

Posted in Practice & Procedure, Trade Secrets

shutterstock_74943355We are pleased to announce the webinar “Protecting Confidential Information and Client Relationships in the Financial Services Industry” is now available as a podcast and webinar recording.

In Seyfarth’s second installment of its 2015 Trade Secrets Webinar series, Seyfarth attorneys will focus on trade secret and client relationship considerations in the banking and finance industry, with a particular focus on a firm’s relationship with its FINRA members.

As a conclusion to this well-received webinar, we compiled a list of key takeaway points, which are listed below.

  • Enforcement of restrictive covenants and confidentiality obligations for FINRA and non-FINRA members are different. Although FINRA allows a former employer to initially file an injunction action before both the Court and FINRA, FINRA, not the Court, will ultimately decide whether to enter a permanent injunction and/or whether the former employer is entitled to damages as a result of the former employee’s illegal conduct.
  • Address restrictive covenant enforcement and trade secret protection before a crisis situation arises. An early understanding of the viability of your restrictive covenants and the steps that you have taken to ensure that your confidential information remains confidential will allow you to successfully and swiftly evaluate your legal options when a crisis arises.
  • Understand the Protocol for Broker Recruiting’s impact on your restrictive covenant and confidentially requirements. The Protocol significantly limits the use of restrictive covenants and allows departing brokers to take client and account information with them to their new firm.

To accommodate our global audience, the third installment in the 2015 Trade Secrets Webinar Series will be available as an on-demand broadcast. Please register to receive access to the International Trade Secrets and Non-Compete Law Update broadcast here.