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Trading Secrets

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

Seyfarth Shaw is Pleased to Sponsor the State Bar of California’s Intellectual Property Protection and Social Media Issues in the Workplace Program

Posted in Social Media, Trade Secrets

CalBarThe workplace is often the laboratory where creative ideas are hatched and innovative products are launched. While striving to create environments where innovation and creativity thrive, successful companies must also ensure that appropriate safeguards and agreements are in place to protect intellectual property. Employers also face challenges in navigating fair trade practices and employee privacy rights while capitalizing on the explosion of social media. Complicating the entire picture are the increasingly fluid borders of where, when, and how work is accomplished in this dynamic economy.

Seyfarth’s Trade Secret and IP groups are scheduled to participate in the State Bar of California’s Day Program entitled “Intellectual Property Protection and Social Media Issues in the Workplace Program,” taking place January 19, 2016 in San Francisco, California.

Seyfarth is a sponsor of the prestigious program, which brings together preeminent speakers from leading intellectual property and employment attorneys from private industry, public agencies, private law firms, and distinguished law schools that will identify and discuss the important intellectual property and social media issues that arise in today’s workplace and suggest practical strategies for addressing them.

Seyfarth Shaw Partner Robert B. Milligan serves as the conference chair of the program and as an officer of the State Bar Intellectual Property Section’s Trade Secret Interest Group and Partner Kenneth L. Wilton will present the luncheon program “Testimonials and Endorsements: How to Properly Involve Employees”.

The State Bar of California and the Intellectual Property Law Section are approved State Bar of California MCLE providers. 7 Hours of MCLE Credit will be awarded to registrants.

For more information, please click here.

Restraint Payments in Australia – Compliance Issues

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

shutterstock_306766586In the latest of our series of post-employment protection blog posts, we consider the compliance and regulatory issues that need to be thought through when drafting an effective post-employment restraint in Australia.

How will any restraint payment be structured?

The threshold question is what kind of payment (if any) to make in return for the agreement of an employee not to engage in particular activities, such as working for a competitor, soliciting business from clients, etc.

The best option will depend on the particular circumstances.

Payment could be part of normal salary. There could be a separate lump sum payment which is paid when the agreement is made or at the time the restraint is called on. Alternatively, an employer might wish to drip feed monthly payments during the restraint period. There are a number of ways to structure the arrangements that best suit the business and the employee concerned.

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It is also possible for no specific payment to be made in return for the restraint. However, at a practical level, paying an individual not to engage in certain activities such as working for a competitor or poaching staff might mean the obligations are more likely to be complied with. For example, an executive who is not “out of pocket” during the restraint period is less likely to need to take the risk of working for a competitor.

From a purely legal perspective payment does not guarantee enforceability. When the payment is made and the quantum are discretionary matters to be taken into account by a court asked to enforce a restraint. In our experience, it is very helpful to be able to point to payment in return for agreement to be restrained.

Payment for a restraint will, of course, raise a number of regulatory disclosure, approval and tax issues.

“Gardening leave” compared to a post-employment restraint

At the outset it’s important to distinguish between:

  • payment of salary during a period of notice of termination where the employee is not required to work, which is referred to commonly as “gardening leave” because the employee cannot commence working for another employer but can engage in leisure activities such as gardening (Notice Payments); and
  • additional payment/s made after termination of employment in return for the former employee’s agreement to be prevented from engaging in certain activities such as working for a competitor or approaching their former clients, suppliers or colleagues (Restraint Payments).

Notice Payments will not raise the same issues as Restraint Payments. However, neither payment will guarantee the legal enforceability of the restrictions but will merely be a factor that a court may consider in deciding whether the restrictions are reasonable. The argument is that the payment will go some way to addressing the public policy concern about restraints to the effect that they should not deprive a person of their ability to earn a living.

Termination benefits requiring shareholder approval

In the case of certain executives (broadly “Key Management Personnel” as defined in the Corporations Act 2001 and directors) Restraint Payments may also require the approval of shareholders in general meeting if they are in connection with termination of employment or the transfer of any undertaking or property of the company. This is because the corporations legislation in Australia specifically deems a payment that is made as part of “a restrictive covenant, restraint-of-trade clause or non-compete clause” a benefit that requires shareholder approval.

Whether such approval is required must be determined on a case by case analysis. Generally, Notice Payments will not be caught by this requirement.

Board determination of “reasonableness” of the payment

For some executives a company’s board of directors may also have to determine whether a Restraint Payment is “reasonable” in the context of the limits on payments to related parties under the corporations legislation. This is an issue that should be considered at the time a restraint provision is drafted and agreed. If a benefit is not considered reasonable then it will require shareholder approval. External advice may need to be taken by a board to assist its determination of whether a proposed payment is reasonable.

Disclosure

Corporations legislation and the Listing Rules of the Australian Securities Exchange impose obligations on companies to make disclosures about executive pay, including Restraint Payments and Notice Payments, in certain circumstances. Whether a payment is ultimately disclosed publicly may be a relevant consideration in deciding whether the payment is commercially acceptable to both the executive or employee and the company. On this basis any potential disclosure obligations should be considered at the time of drafting and agreeing payment obligations for restraints.

Taxation

Finally, the tax treatment of a Restraint Payment may be different to the tax treatment of a Notice Payment, depending on whether the Restraint Payment is categorised as an employment termination payment or a capital payment. Specific consideration of this issue will also be required.

Well drafted restraints of trade are a necessary and reasonable business tool and can be highly effective to protect business interests. To be enforceable, and to prevent side issues becoming a problem, the above matters need to be carefully thought through at the time the restraint is drafted and agreed.

Drafting and Litigating Post-Employment Restrictive Covenants in Australia – Tailoring Your Restraint to Ensure the Right Fit

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

By Michael Tamvakologos and Justine Giuliani

We will now look at the different types of post-employment restrictive covenants, and work through a checklist of questions employers should ask themselves when drafting a restraint to make sure it’s the right fit.

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A good restraint is not about creating the ultimate “catch all” provision. Rather, it requires a series of good choices to be made that protect the most important business assets. Whilst Australian and English courts have on occasion upheld “cascading” restraints (which might, for example, operate for 12, 9 or 6 months, whichever time period a court finds is enforceable) in practice, cascading restraints can lead to business uncertainty. This is because it is not clear when the employee leaves which time period will be enforceable.

Think commercially first and about the legalities second

The starting point is to ask, what is the restraint trying to protect? These are the assets of the business that would be most vulnerable if a particular employee left. In order for a restraint to be enforceable, it must be reasonable to protect a legitimate business interest. Australian courts have recognised that an employer’s trade secrets, confidential information, customer or client connections, and staff connections are all protectable interests that are capable of supporting a restraint.

What legal tools can you use?

The next question is, what is the most effective way to protect the identified interest? This is about choosing a restraint that is targeted because the wider the restraint, the less likely it is that a court will consider it reasonable to protect this interest. Broadly, there are four different types of restraint that can be used either as a stand-alone provision, or in combination.

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A pure non-compete restraint is the most difficult to enforce because it prevents an employee from working for a competitor of the former employer in any capacity.

An employer can increase the likelihood that a non-compete restraint will be enforceable if they can show it was the subject of specific negotiation (either at the time the employment contract was entered into, or during the employment), or it is accompanied by provisions for payment tied to the period of the restraint to minimise financial disadvantage to the employee whilst he or she is out of the employment market.

A non-compete restraint can be used where other forms of protection would be inadequate to protect the employer’s interest. This may occur where an employee possesses specific confidential information obtained during the course of their employment, or more commonly where they acted as the face of the business and the custodian of key client relationships. The courts have recognised that a standard confidentiality clause or non-solicitation restraint may not provide adequate practical protection in these circumstances.

Non-solicitation

A non-solicitation restraint is designed to protect customer connections or the goodwill of the business by preventing an employee from enticing away customers or clients of their former employer. As a rule, a non-solicitation restraint should be restricted to customers or clients with whom the employee had a meaningful relationship, or provided services on a continuing basis. This is because a restraint which applies to all customers or clients of the business, including those with whom the employee had no contact, is likely to go beyond what is reasonably necessary to protect the employer’s interest.

Non-dealing

A non-dealing restraint prevents an employee from accepting instructions or business from former clients where it is the client who makes the approach or initiates contact. This type of restraint has its advantages, including that it overcomes the problem of proving actual solicitation by a former employee – often a contentious point in litigation.

Non-poaching

As the name suggests, a non-poaching restraint prevents an employee from poaching other employees of their former employer. Employers should discriminate between employees who are critical to their business and those who are not, and draft the restraint so that it applies to this specific class. The case law shows that a restraint on employment that casts the net too wide and prohibits the solicitation of any employee right down to the “tea lady” is unlikely to be enforceable.

Finally, employers should test the restraint by looking for, and addressing any areas of potential vulnerability. These are the points of attack an opponent might raise if the enforceability of the restraint is ever tested in court. For example, providing an employee with an explanation of the restraint and the reasons for it, and giving him or her the opportunity to obtain legal advice before committing to the restraint, feature in a number of cases where a restraint was upheld (see the “success factors” in our map above).

Updating the restraint

Like any piece of valuable equipment, a restraint needs to be routinely maintained. Where an employee changes position, or the business diversifies its services or product lines or takes on particularly important clients, the restraint should be updated. This could be done, for example, by way of a contract refresh tied to the annual pay review or promotion cycle.

Putting in place a system to administer effective restraint provisions will ensure that you have a targeted restraint in place at the time you need it most, when business assets are at risk.

Please contact any of our partners to discuss the relevant legal touch-points or to access our unique online post-employment restraint solution. We encourage you to leave a comment below.

Proposed EU Trade Secrets Directive Crosses Another Hurdle with “Provisional Agreement” Between Council and Parliament

Posted in International, Trade Secrets

shutterstock_178722866As regular readers of this blog will note, we have been tracking progress of the European Commission’s proposed Directive to protect trade secrets as it has made its way through the European Union’s complicated legislative process over the past several years. Last week, the proposed Directive crossed yet one more procedural hurdle with a “provisional agreement” on the Directive reached by the European Council (represented by the Luxembourg presidency) and representatives of the European Parliament.

The European Commission first proposed the Directive in November, 2013 to provide greater and more consistent protection of trade secrets throughout the EU’s 28-Member States. Earlier this year, the European Parliament’s Committees on Internal Market and Consumer Protection and Industry, Research, and Energy published comments and proposed amendments to the Directive.  The Parliament’s Committee on Legal Affairs subsequently issued a draft Legislative Resolution that adopted some (but not all) of the amendments proposed by the other committees.  The provisional agreement now clears the way for a vote in the European Parliament next year.

Although the text of the provisional agreement is not currently available, a press release issued by the European Council provides a general overview of the terms.  As expected, the proposed Directive will provide that EU member states must ensure that adequate civil procedures and remedies are available to redress illegal acquisition, use, and disclosure of trade secrets without undermining fundamental rights and freedoms or the public interest.  Consistent with concerns raised (and amendments proposed) by the Parliamentary committees that previously reviewed the proposed Directive, the Council and representatives of the European Parliament agreed that the proposed Directive (i) will protect whistleblowers, (ii) will not place any limitations on investigative journalism, (iii) will not place any restrictions on workers in their employment contracts, and (iv) will not affect employees’ rights to enter into collective bargaining agreements.

In addition, the press release suggests that the Council and representatives of the Parliament have reached an agreement about the limitations period for claims of trade secret misappropriation.  The Legal Affairs Committee’s draft resolution from earlier this year provided that “Member States shall ensure that actions for the application of the measures, procedures and remedies provided for in this Directive may be brought within three years after the date on which the applicant became aware, or had reason to become aware, of the last fact giving rise to the action.”  While this three-year limitations period is longer than the Commission’s original text (which proposed a limitations period of “at least one year but not more than two years), it is still somewhat short by comparison to the existing limitations period in some EU member states. (For example, in the UK, a common law claim for breach of confidence or breach of contract is six years.)  Based on the European Council’s press release, it is now clear that the Council and representatives of the European Parliament have agreed on a limitations period that “will not exceed six years.”

The press release is less clear on the protections that will be available to trade secrets during litigation.  The Commission’s original text provided that:

Member States shall also ensure that the competent judicial authorities may, on a duly reasoned application by a party, take specific measures necessary to preserve the confidentiality of any trade secret or alleged trade secret used or referred to in the course of the legal proceedings relating to the unlawful acquisition, use or disclosure of a trade secret. The measures referred to . . .  shall at least include the possibility: (a) to restrict access to any document containing trade secrets submitted by the parties or third parties, in whole or in part; (b) to restrict access to hearings, when trade secrets may be disclosed, and their corresponding records or transcript.   In exceptional circumstances, and subject to appropriate justification, the competent judicial authorities may restrict the parties’ access to those hearings and order them to be carried out only in the presence of the legal representatives of the parties and authorised experts . . .

In other words, the original text contemplated “Attorneys’ Eyes Only” protective order like those that are typically used in trade secrets cases in the U.S.

In contrast, in its draft Legislative Resolution, the Legal Affairs Committee watered down this language with the following proposed language that would appear to eliminate true ““Attorneys’ Eyes Only” protective orders:

The measures referred to . . .  shall at least include the possibility: (a) to restrict access to any document containing trade secrets or alleged trade secrets submitted by the parties or third parties to a limited number of persons, in whole or in part provided that at least one person from each of the parties, and, where appropriate in view of the proceedings, their respective lawyers and/or legal representatives, are given access to the document in full; (b)  to restrict access to hearings, when trade secrets or alleged trade secrets may be disclosed, and their corresponding records or transcript to a limited number of persons, provided that it includes at least one person from each of the parties, and, where appropriate in view of the proceedings, their lawyers and/or legal representatives . . .

Unfortunately, the Council’s press release does not explain how the provisional agreement resolves this conflict but states only that “[w]here necessary, confidentiality of trade secrets will also be preserved during the course of and after the legal proceedings.” 

Now that the provisional agreement has been reached, the Parliament and Council will conduct a legal-linguistic review of the text.  Once that process has been completed, the proposed Directive will then be submitted to the full European Parliament for approval.  Currently, the European Parliament is expected to vote on the initiative around March 2016, but the precise date for a first reading has yet to be determined.  If enacted, Member States will be required to enact national law consistent with the Directive within two years.

We will continue to track progress of the proposed Directive, as well as the proposed Defend Trade Secrets Act in the U.S. Congress (which currently has 20 co-sponsors in the Senate and over 100 co-sponsors in the House).  In the meantime, companies on both sides of the Atlantic should review their current procedures for protecting trade secrets to ensure that they can fully take advantage of these proposed laws if enacted next year.  For practical tips on ways to maximize protection of trade secrets in the workplace, please check out the best practices highlighted in our 2014 webinar series.

 

Leveraging Employment Restraints to Protect Business Assets

Posted in Practice & Procedure, Restrictive Covenants, Trade Secrets

shutterstock_286315091When a key employee subject to an employment restraint leaves a business to join a competitor, fast decisions need to be made to protect client goodwill or guard against misuse of confidential information.

The more leverage an employer has against the former employee and his or her new employer, the better the prospects of negotiating a sensible solution quickly or, failing that, taking successful legal action.

Set out below is a summary of the key legal touch points:

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Proving loss

One issue that looms large in these situations, particularly where the decision taken is to start legal action, is proving that the business has suffered financial loss. Often, there are no immediate financial losses in the wake of the employee’s departure. It may be some time before conduct in breach of the restraint hits the business’ bottom line. The easier it is to prove loss, the more confident will be the decision to proceed with a damages case.

Some employers try to side step this difficulty by including a “liquidated damages” clause in the restraint provision. Such a clause specifies up front the financial damage that will be caused to the employer if the restraint is breached. For example, in the accounting profession, it is not uncommon to see liquidated damages provisions which describe likely losses as two, three or even four times annual revenue, for a particular client if that client was to move their business because of breach of the employment restraint.

In theory, it is easier to prove loss where a liquidated damages provision is included in the contract because the former employee and the employer have agreed up front what the damage will be if the restraint is breached. It also provides a clear starting point for negotiations if the dispute takes that path.

But in practice, there’s more to it than that:

  • Liquidated damages provisions can be attacked on the basis that they are a penalty under law and unenforceable.
  • Courts may be reluctant to give the employer an injunction to stop an actual or threatened breach of the restraint if it appears that damages will be an adequate remedy. Liquidated damages provisions arguably suggest that damages will be adequate (and more easily assessed) if in fact the former employee has breached their employment restraint.

Is it worth including a liquidated damages provision in an employment restraint?

A lot turns on what is accepted practice in the particular industry and which assets of the business are being protected (our restraint map below shows the key protectable interests). If a liquidated damages provision is to be included in the contract, it is important to draft the provision carefully so that it is (a) enforceable and (b) doesn’t cut down the other options available to an employer (such as a court-ordered injunction to stop the breach).

This will ensure that the leverage the business needs is there when it is needed most.

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Best Practices Shared in Seyfarth Shaw’s 2015 Trade Secrets Webinar Series Year in Review

Posted in International, Legislation, Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants, Social Media, Trade Secrets

shutterstock_345999860Throughout 2015, Seyfarth Shaw’s dedicated Trade Secrets, Computer Fraud & Non-Competes Practice Group hosted a series of CLE webinars that addressed significant issues facing clients today in this important and ever-changing area of law. The series consisted of nine webinars:

  1. 2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete and Computer Fraud Law
  2. Protecting Confidential Information and Client Relationships in the Financial Services Industry
  3. International Trade Secrets and Non-Compete Law Update
  4. Employee Social Networking: Protecting Your Trade Secrets in Social Media
  5. How and Why California is Different When It Comes to Trade Secrets and Non-Competes
  6. State Specific Non-Compete Oddities Employers Should Be Aware Of
  7. So You Want An Injunction in A Non-Compete or Trade Secret Case?
  8. Social Media Privacy Legislation Update
  9. Enforcing Non-Compete Provisions in Franchise Agreements

As a conclusion to this well-received 2015 webinar series, we compiled a list of key takeaway points for each program, which are listed below. For those clients who missed any of the programs in this year’s series, the webinars are available on CD upon request, or you may click on the title below each webinar for the online recording. We are pleased to announce that Seyfarth will continue its trade secrets webinar programming in 2016, and we will release the 2016 trade secrets webinar series topics in the coming weeks.

2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete and Computer Fraud Law

The first webinar of the year, led by Michael Wexler, Robert Milligan and Daniel Hart, reviewed noteworthy cases and other legal developments from across the nation in the areas of trade secret and data theft, non-compete enforceability, computer fraud, and the interplay between restrictive covenant agreements and social media activity, and provided predictions for what to watch for in 2015.

  • As demonstrated by high-profile hacking attacks and criminal prosecutions for trade secrets theft, companies’ trade secrets are at greater risk today than ever before. To mitigate the risk of trade secrets theft, companies should review their security procedures, policies on IT resources and email usage, and employee exit interview/termination processes to ensure that the company’s assets are adequately protected.
  • Use of social media continues to generate disputes. As more and more states adopt social media privacy laws, companies increasingly seek to assert an ownership interest in work-related social media accounts. Additionally, as the NLRB cracks down on social media policies that prohibited employees from engaging in protected activities, employers should periodically review their policies regarding use of social media in the workplace.
  • Courts and regulatory agencies continue to scrutinize non-competes and other restrictive covenants.  In light of these and other continuing developments in non-compete law, employers should periodically review their existing agreements and on-boarding procedures to maximize the likelihood that their agreements will be upheld. To learn more, please see our 50 State Non-Compete and Trade Secrets Desktop Reference.

Protecting Confidential Information and Client Relationships in the Financial Services Industry

The second installment, led by Scott Humphrey, Jason Stiehl and James Yu, focused 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.

  • 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 company’s restrictive covenants and the steps your company has taken to ensure that its confidential information remains confidential will allow your company to successfully and swiftly evaluate its 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.

International Trade Secret and Non-Compete Law Update

In the third installment, attorneys Wan Li, Ming Henderson and Daniel Hart focused on non-compete and trade secret considerations from an international perspective. Specifically, the webinar involved a discussion of non-compete and trade secret issues in Europe and China as 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.

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 contracts 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 in 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 her/his 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 are 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 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 ON TOP of 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 intellectual property rights.
  • As a notable (and relatively recent) development, injunctive relief for trade secret misappropriation is available in Shanghai and Anhui.

Employee Social Networking: Protecting Your Trade Secrets in Social Media

The fourth installment, presented by John Tomaszewski, Eric Barton and Joshua Salinas, addressed the relationship between trade secrets, social media, and privacy.

Social Media Privacy Laws are on the Rise

  • At least 20 states now have laws prohibiting employers from requiring or even asking for access to employees’ or job applicants’ personal social media accounts. Penalties for violations range from nominal administrative fines to much larger damages, including punitive damages and attorneys’ fees. Many of the laws, however, have broad exceptions and loopholes, including required employer access of “nonpersonal” accounts and on suspected data theft or workplace misconduct. To learn more, please see our Social Media Privacy Legislation Desktop Reference.

Safeguard Your Trade Secrets

  • Protecting your company’s valuable confidential information and trade secrets from disloyal employees is a very different exercise than keeping strangers and competitors locked-out. This exercise is further complicated by inconsistent privacy legislation, which can vary wildly from state to state. For example, a disloyal employee secretly copies a confidential employer customer list onto his personal LinkedIn account. The employee works in a state that has adopted the new privacy legislation, which has an exemption for suspected data theft. The employer hears unsubstantiated gossip about that list copying, but does not investigate based on the flimsy evidence and for fear of violating the privacy law. The employee later resigns, and uses that list for a competitor. Did the former employer waive a trade secrets claim against the employee because it decided not to investigate, even though it could have? Did that decision amount to an unreasonably insufficient effort to protect its trade secrets?

Social Media and Bring Your Own Device (BYOD)

  • Social media is an extension of the trend to combine work, and non-work related activities within the same platform. Just like smartphones allow you to engage in both work and non-work related emailing, the social media platforms continue to drive the conflation of personal and employee activity. As a result, a holistic approach needs to be taken in managing the employee. Otherwise, what was once considered a reasonable policy at work may get applied to private or protected activity and thereby become at a minimum, unreasonable; and in some cases, illegal.

How and Why California is Different When it Comes to Trade Secrets and Non-Competes

The fifth installment, directed by Robert Milligan, James McNairy and Joshua Salinas, focused on recent legal developments in California trade secret and non-compete law and how it is similar to and diverse from other jurisdictions, including: a discussion of the California Uniform Trade Secrets Act; the interplay between trade secret law and Business and Professions Code Section 16600 (which codifies California’s general prohibition of employee non-compete agreements), and recent case developments regarding non-compete agreements and trade secret investigations. The panel discussed how these latest developments impact counseling, litigation and deals involving California companies.

  • Broad “no re-hire” provisions in settlement agreements may, under certain circumstances, constitute unlawful restraints of trade under California law, as reflected in Golden v. California Emergency Physicians Medical Group (9th Cir. Apr. 8, 2015).
  • Alone, voluntary dismissal of a trade secret claim is not a safe harbor to liability for attorneys’ fees if the claim otherwise meets the criteria for having been brought or maintained in bad faith.
  • The preemptive scope of California’s Uniform Trade Secrets Act is very broad. As a result, tort or conversion claims that might be viable in other states may be preempted when pleaded in California with a trade secret claim, provided independent unlawful acts are not alleged.

State Specific Non-Compete Oddities Employers Should Be Aware Of

In Seyfarth’s sixth installment, attorneys Michael Baniak and Paul Freehling discussed the significant statutory changes to several jurisdictions’ laws regarding trade secrets and restrictive covenants and pending legislation proposed in additional jurisdictions over the past year. As trade secrets and non-compete laws continue to evolve from state to state in piecemeal fashion, companies should continually revisit their trade secrets and non-compete strategies in light of the evolving legal landscape and legislative trends.

  • Enforceability of non-compete, non-solicit, and confidentiality covenants in employment agreements depends primarily on the applicable statutes, and pertinent judicial decisions and conflict of laws principles, regarding (a) the acceptable breadth of such covenants, and (b) appropriate balancing of the legitimate business interests of employers, employees, and the public. Enforceability requires constant vigilance in updating the covenants because the law, business, and employment evolves often very rapidly.
  • Because each jurisdiction’s version of the Uniform Trade Secrets Act as enacted (it has been adopted in one form or another in the District of Columbia and each of the 50 states except New York and Massachusetts) is unique, all relevant jurisdictions’ versions must be analyzed.
  • Oddities in the law of restrictive covenants include: (a) hostility in a few states to non-competes and/or non-solicit covenants in general; (b) in some states (whether by statutory provision or judicial fiat); certain employees are exempt from such covenants; (c) there are disparities in various courts’ willingness to “blue pencil,” reform, or invalidate covenants deemed overbroad as written; and (d) there are variations in different courts’ views as to whether only actual disclosure, or also threatened or inevitable disclosure, of trade secret or confidential information will be enjoined.

So You Want An Injunction in A Non-Compete or Trade Secret Case?

In Seyfarth’s seventh installment, attorneys Justin Beyer, Eric Barton and Bob Stevens focused on the issues confronting plaintiffs in preparing for and prosecuting trade secret cases and the various ins and outs of seeking both temporary restraining orders and preliminary injunctions.

  • Employers can best protect their trade secrets by instituting robust training, policies and procedures aimed at educating its work force as to what constitutes confidential information, and that this information belongs to the employer, not the employee. By utilizing confidentiality, invention assignment and reasonable restrictive covenants, as well as implementing onboarding and off-boarding protocols, educating employees on non-disclosure obligations, educating employees on that data which the employer considers confidential, clearly marking the most sensitive data, and restricting access to confidential information, both systemically and through hardware and software blocks, employers can both educate and prevent misappropriation.
  • If an employee voluntarily resigns his or her employment with the company, the employer should already have in place a specific protocol to ensure that the employee does not misappropriate company trade secrets. Such steps include questioning the employee on where he intends to go, evaluating whether to shut off access to emails and company systems prior to the expiration of the notice period, requesting a return of company property, including if the company utilizes a BYOD policy, and reminding the employee of his or her continuing obligations to the company. Likewise, companies should have robust onboarding policies in place to help avoid suit, such as attorney review of restrictive covenants, offer letters that specifically disclaim any desire to receive confidential information from competitors, and monitoring of the employee after hire to ensure that they are not breaching any confidentiality or non-solicitation obligations to the former employer.
  • If a company finds itself embroiled in litigation based on either theft of its trade secrets or allegations that it either stole or received stolen trade secrets, it is important to take swift action, including interviewing the players, preserving the evidence, and utilizing forensic resources to ascertain the actual theft or infection (if you are on the defense side). Companies defending against trade secret litigation also need to analyze and consider whether an agreed injunction is in its best interests, while it investigates the allegations. These types of cases tend to be fast and furious and the internal business must be made aware of the impact this could have on its customer base and internal resources.

Social Media Privacy Legislation Update

In Seyfarth’s eighth installment, Seyfarth attorneys Robert Milligan, Daniel Hart and Joshua Salinas discussed their recently released Social Media Privacy Legislation Desktop Reference and addressed the relationship between trade secrets, social media, and privacy legislation. We compiled a list of brief summaries of the more significant cases that were discussed during the webinar:

  • In KNF&T Staffing Inc. v. Muller, No. 13-3676 (Mass. Super. Oct. 24, 2013), a Massachusetts court held that updating a LinkedIn account to identify one’s new employer and listing generic skills does not constitute solicitation. The court did not address whether a LinkedIn post could ever violate a restrictive covenant.
  • Outside of the employment context, the Indiana Court of Appeals in Enhanced Network Solutions Group Inc. v. Hypersonic Technologies Corp., No. 951 N.E.2d 265 (Ind. Ct. App. 2011) held that a non-solicitation agreement between a company and its vendor was not violated when the vendor posted a job on LinkedIn and an employee of the company applied and was hired for the position, because the employee initiated all major steps that led to the employment.
  • In the context of Facebook, a Massachusetts court ruled in Invidia LLC v. DiFonzo, No. 2012 WL 5576406 (Mass. Super. Oct. 22, 2012) that a hairstylist did not violate her non-solicitation provision by “friending” her former employer’s customers on Facebook because “one can be Facebook friends with others without soliciting those friends to change hair salons, and [plaintiff] has presented no evidence of any communications, through Facebook or otherwise, in which [defendant] has suggested to these Facebook friends that they should take their business to her chair.”
  • Similarly, in Pre-Paid Legal Services, Inc. v. Cahill, No. CIV-12-346-JHP, 2013 U.S. Dist. LEXIS 19323 (E.D. Okla., Jan. 22, 2013), a former employee posted information about his new employer on his Facebook page “touting both the benefits of [its] products and his professional satisfaction with [it]” and sent general requests to his former co-employees to join Twitter. A federal court in Oklahoma denied his former employer’s request for a preliminary injunction, holding that communications were neither solicitations nor impermissible conduct under the terms of his restrictive covenants
  • The Virginia Supreme Court in Allied Concrete Co. v. Lester, 285 Va. 295 (2013) upheld a decision sanctioning a plaintiff and his attorney a combined $722,000 for deleting a Facebook account and associated photographs that undermined the plaintiff’s claim for damages stemming from the wrongful death of his wife in a car accident. The deleted photographs showed plaintiff holding a beer while wearing a T-shirt with the message “I Love Hot Moms.” Subsequent testimony revealed that the plaintiff’s attorney had instructed his paralegal to tell the plaintiff to “clean up” his Facebook entries because “[they did] not want blowups of [that] stuff at trial.”
  • PhoneDog v. Noah Kravitz, No. C11-03474 MEJ, 2011 U.S. Dist. LEXIS 129229 (N.D. Cal. 2012) involved a dispute over whether a Twitter account’s followers constitute trade secrets even when they are publically visible. The court denied the defendant’s motion to dismiss and ruled that PhoneDog, an interactive mobile news and reviews web resource, could proceed with its lawsuit against Noah Kravitz, a former employee, who PhoneDog claimed unlawfully continued using the company’s Twitter account after he quit. The court held that PhoneDog had described the subject matter of the trade secret with “sufficient particularity” and satisfied its pleading burden as to Kravitz’s alleged misappropriation by alleging that it had demanded that Kravitz relinquish use of the password and Twitter account, but that he refused to do so. With respect to Kravitz’s challenge to PhoneDog’s assertion that the password and the Account followers do, in fact, constitute trade secrets—and whether Kravitz’s conduct constitutes misappropriation, the court ruled that such determinations require the consideration of evidence outside the scope of the pleading and should, therefore, be raised at summary judgment, rather than on a motion to dismiss. The parties ultimately resolved the dispute.
  • The Second Circuit Court of Appeals in Triple Play v. National Labor Relations Board, No. 14-3284 (2d. Cir. Oct. 21, 2015) affirmed an NLRB decision that a Facebook discussion regarding an employer’s tax withholding calculations and an employee’s “Like” of the discussion constituted concerted activities protected by Section 7 of the National Labor Relations Act. The Facebook activity at issue involved a former employee posting to Facebook, “[m]aybe someone should do the owners of Triple Play a favor and buy it from them. They can’t even do the tax paperwork correctly!!! Now I OWE money . . . Wtf!!!!” A current employee “Liked” the post and another current employee posted, “I owe too. Such an asshole.” The employer terminated the two employees for their Facebook activity. The Second Circuit affirmed the NLRB’s decision that the employer’s termination of the two employees mentioned Facebook activity was unlawful.

Enforcing Non-Compete Provisions in Franchise Agreements

In Seyfarth’s ninth and final installment, attorneys John Skelton, Erik Weibust and Anne Dunne focused on how to implement and enforce covenants against competition in the franchise context. A franchisor’s trade secrets, confidential information, and goodwill are often among its core assets, and implementing and enforcing covenants against competition are a common, and effective, means of protecting such business interests.

  • For franchisors, non-compete provisions, especially post-termination restrictive covenants, are an important part of the franchise relationship because franchisees are given access to a franchisor’s confidential information and trade secrets. Upon the termination, expiration or non-renewal of the franchise agreements, franchisors have a vested interest in preventing the use of such information in a competitive business and in protecting the integrity of the franchise network and their goodwill.
  • The enforceability of non-compete provisions is most often litigated in the context of a request for a preliminary injunction, and thus franchisors need to be able present evidence to establish: (1) all of the necessary elements, especially that the franchisor will suffer irreparable harm to its legitimate business interests and goodwill if the franchisee violates the terms of the agreed upon non-compete; and (2) that the restrictions are reasonable in time and scope.
  • The enforceability of non-compete provisions varies significantly by state, so national franchisors must ensure that restrictive covenants are drafted to comply with the various definitions of legitimate business interests and protected goodwill, and the different blue pencil, red pencil and reformation rules.

2016 Trade Secret Webinar Series

Beginning in January 2016, we will begin another series of trade secret webinars. The first webinar of 2016 will be “2015 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law” on January 28. To receive an invitation to this webinar or any of our future webinars, please sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list by clicking here. We are also tracking the latest on the movement to federalize trade secrets law. Please visit our dedicated page on the blog.

Seyfarth Trade Secrets, Computer Fraud & Non-Compete attorneys are happy to discuss presenting similar presentations remotely or in person to your groups for CLE credit.

What does the Trans Pacific Partnership mean for IP in Australia?

Posted in Cybersecurity, Data Theft, International, Trade Secrets

shutterstock_337013828The Trans Pacific Partnership Agreement (“TPP) between twelve Pacific Rim counties, including Australia and the United States, was finally made public on 5 November.

The text of the Agreement will now be reviewed by various parliamentary committees before Parliament votes on legislation to implement the Agreement in Australia, likely to be in February or March next year. If the implementing legislation is passed in Australia and the other signatory countries, the Agreement will be ratified and come into force. It is expected that it could take up to two years before the Agreement comes into force in all 12 signatory countries.

The intellectual property provisions of the TPP Agreement are contained in Chapter 18. Chapter 18 includes a number of measures designed to protect intellectual property rights, many of which reflect Australia’s current intellectual property laws. However, a number of concerns have been raised including by the Australian Competition and Consumer Commission (ACCC), Australia’s competition regulator, in its submissions to the Productivity Commission. The ACCC is concerned that some of the provisions in Chapter 18 may “tilt the balance in favour of IP rights holders to the detriment of competition and consumers”. In addition, the ACCC has warned that the investor-state dispute settlement provisions (which give foreign companies the right to sue the Australia government for introducing laws which harm their interests) “risk impeding domestic reforms in the public interest”.

The biggest change to intellectual property law in Australia which will result if the Agreement is implemented in its current form is Australia would be required to implement criminal procedures and penalties for acts including the unauthorised misappropriation of trade secrets. Currently in Australia the only action which can be taken against a person or company who misappropriates trade secrets is a civil claim for breach of confidence. The Agreement also does not make clear what defences will be available to those alleged to have misappropriated trade secrets which is concerning for journalists and whistleblowers.

At this stage, it is still a case of wait and see. Various bodies are expected to conduct further analysis on the provisions of the Agreement to determine the likely impact on Australia. Also, depending on Parliament’s assessment of the implementation legislation, the Agreement may need to be renegotiated or side letters entered into to address any issues.

Non-Disclosure Agreement Enforceable Although Unlimited In Time And Area

Posted in Restrictive Covenants, Trade Secrets

shutterstock_106099457A salesman for a medical device manufacturer signed a confidentiality covenant at the time he was hired.  A dozen years later, he resigned and went to work for a competitor.  The former employer sued him in an Ohio federal court.  Because the covenant had neither temporal nor geographic limitations, the trial court invalidated the covenant and dismissed the breach of contract claim.  The appellate court reversed, holding that no such limits are required for a confidentiality agreement. Orthofix, Inc. v. Hunter, Case No. 15-3216 (Nov. 17, 2015).

Status of the case.  Orthofix’s complaint alleged trade secret misappropriation, breach of non-compete and confidentiality covenants, and tortious interference with sales contracts.  The company sought $1.6 million in lost profits.  The trial court entered judgment in favor of Orthofix on the tortious interference claim (awarding $62,000 in damages) but found for the defendant with regard to trade secret misappropriation and breach of contract.  In a recent decision not recommended for publication, the Sixth Circuit Court of Appeals (a) held that the confidentiality covenant was enforceable, (b) determined that the defendant violated it by using and disclosing Orthofix’s confidential information, and (c) remanded the case for calculation of breach of contract damages.

Background.  Orthofix makes and sells orthopedic medical devices.  Hunter, who had no prior experience selling those products, worked for Orthofix for 12 years.  The same day he resigned, he went to work for an Orthofix competitor.  According to the appellate court, he possessed on his computer and in his memory confidential information such as Orthofix’s customer list, sales and pricing data, and physician schedules, preferences, and prescribing habits.  He used and disclosed this information by introducing his former customers to his new employer and providing their buying history.

The non-disclosure agreement.  Hunter’s non-disclosure agreement with Orthofix stated that he would “never use or disclose any confidential information which [he] acquired during the term of [his] employment with the corporation.”  The term “confidential information” was defined as anything “pertaining to [Orthofix’s] business or financial affairs . . . developed by [Orthofix] at considerable time and expense, and which could be unfairly utilized in competition with the corporation.”  The parties agreed that Texas contract law applied (Orthofix is headquartered in Texas).

Trial court’s decision.  The lower court concluded that Orthofix could not maintain a breach of contract claim for misuse of “confidential information.”  That court reasoned that under Texas law, the only proprietary data qualifying as “confidential information” would be trade secrets protected by the Ohio Uniform Trade Secrets Law.  However, the court determined that there weren’t any.  Accordingly, the court said the covenant would be deemed to constitute a non-compete and was unenforceable because it was missing duration and territorial limitations.

Ruling on appeal.  The Sixth Circuit applied the following very different analysis.

(a) A confidentiality covenant that prohibits the use and disclosure of “general skills or knowledge” is invalid under Texas law as an unreasonable restraint on trade.  Here, however, the covenant protected “confidential information,” not “general skills or knowledge.”

(b) A covenant that applies to data that is “valuable, not readily available, and acquired at great expense and effort” is valid in Texas.  That is how “confidential information” was defined in the covenant here, and that is the kind of data Hunter used and disclosed.  Therefore, the covenant is enforceable.  The absence of duration and geographical limits does not change this result.

(c) A covenant that protects “trade secrets,” as defined under applicable state law, might also be valid.  However, in light of the appeals tribunal’s ruling regarding “confidential information,” that court found no need to review the trial court’s decision that Orthofix did not have any “trade secrets” as defined in the Ohio Uniform Trade Secrets Act.

Takeaways.  The enforceability of a confidentiality covenant in an employment agreement without time or geographical limitations may turn, at least in part, on how the information that may not be disclosed is defined.  Precluding dissemination of “general skills and knowledge” may constitute an invalid attempt to restrain trade.  But, a covenant that prohibits the use or disclosure of narrowly tailored and carefully defined “confidential information” may be enforceable.

The Sixth Circuit observed that “confidential information” under Texas law includes memorized data.  In a minority of states, courts hold that a non-disclosure agreement is not violated by revealing a prior employer’s proprietary data which the ex-employee only committed to memory.

Although not an issue in Orthofix, a judge might decline to enjoin an ex-employee’s disclosure or use of a former employer’s “confidential information” if the information is deemed to be stale.  In that event, disclosure or use may be unlikely to injure the movant.

Australia Non-Compete Update: the Difference Between Winning and Losing Restraint Litigation is Often Good Housekeeping

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

shutterstock_214658791By Michael Tamvakologos and Justine Giuliani

An enforceable restraint of trade can be a key business asset. Or some might think about it as an insurance policy. The capacity to preserve customer connections, protect confidential information and discourage key executives from setting up their own business or moving to a competitor can be critical to information rich businesses operating in a competitive market. Ensuring the currency of your restraint provisions is an important exercise in risk management.

Experience in this area demonstrates one key distinction which separates cases where restraints are successfully upheld and those where compromise outcomes are achieved. In successful cases, typically, the restraint provision has been drafted quite neatly around the key protectable interests. When seeking to enforce a restraint, an employer will be required to show there is a protectable interest capable of supporting the restraint. This is the first limb of the test for enforceability. The scope, duration and geographical operation of the restraint are logically tied to the protectable interest (see our map below). An employer will need to make out each of these elements to meet the second limb of the test.

This success can be attributed to the practice of regularly revisiting the questions of which key executives or employees should be subject to restraints, and how those restraints should operate. The yearly promotion, pay rise or management re-shuffle cycles are perfect opportunities to update restraint provisions. Often, this is when operational changes (such as the make-up of roles) become effective, so restraints can be tweaked to align with these changes. A promotion or pay rise can be tied to a new contract or restraint provision. Instead of adopting a one-size-fits-all approach when an employee first joins the business, employers can increase the likelihood that a restraint will be enforceable by showing it was the subject of specific negotiation during the employment.

Seyfarth Shaw Australia Post Employment Map

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If the restraint then needs to be relied upon down the track, the employer has the benefit of a provision which protects a current business asset (e.g. key connections with important customers or suppliers who the employee is in contact with) and is likely to be enforceable in Court. If the opportunity to update a restraint has been missed, it’s then necessary to try to force fit the facts into a restraint that might have been drafted years earlier in a very different business context – for example, when the employee was performing a different role. This can increase the degree of difficulty when enforcing a restraint substantially. Although courts will give employers some latitude, because the reasonableness of a restraint is judged at the time it was entered into, that latitude is limited. Regular housekeeping means that it won’t be necessary to call on this latitude because the restraint is fit for its purpose, and enforcement proceedings can be approached with confidence.

Untrusted Advisor: How Your Law Firm May Fail to Protect Your Data

Posted in Cybersecurity, Data Theft, Trade Secrets

shutterstock_147820271In recent years, the prevalence of data and information security breaches at major corporations have become increasingly more commonplace.  While general awareness may be increasing, many companies are still neglecting to address serious information security issues.

Breached data can include proprietary or confidential information, trade secrets, personally identifiable information, health-related data, privileged communications, and regulatory data.  Such data is often subject to preservation due to pending or reasonably anticipated litigation, government investigation, due diligence, or other applicable legal matter, meaning the data is routinely transferred and shared with outside counsel for analysis and support of clients’ claims and defenses.

Many law firms provide guidance regarding information governance to clients, however more times than not, firms fail to realize that they too are also responsible for following similar guidelines. Appropriate precautions must be in place throughout a firm to protect the integrity and sanctity of client data, prevent unauthorized access, and to ensure timely remediation.  However, firms must also have this data available for litigation response, analysis, and review. Therefore, keeping data entirely offline is rarely an option.

There are several pillars of governance that law firms should consider when examining the handling of both their own data as well as that of clients.  As a fiduciary of their clients’ data, firms that fail to address these issues will eventually find themselves in an ethical nightmare, that when applied to a partnership creates a considerable problem.

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