The National Labor Relations Board moved from theory to practice in this administration’s battle against restrictive covenants. Recently, the Regional Director of Region 9 of the National Labor Relations Board filed a consolidated complaint alleging that certain restrictive covenants contained in offer letters and policies in an employee handbook violated the National Labor Relations Act. This complaint is a logical outgrowth of GC Memo 23-08, in which NLRB General Counsel Jennifer Abruzzo set out her view that “the proffer, maintenance, and enforcement” of restrictive covenants violates Section 8(a)(1) of the NLRA. Undoubtedly, this matter will serve only as the first test case, but not the last. For that reason, and because the broader non-compete landscape has shifted, employers might consider revisiting their restrictive covenants practices to mitigate risk. The complaint also serves as a reminder that employers should review their employment policies and handbooks regarding employee communications—particularly if those policies restrict communications about compensation or other terms and conditions of employment.

This complaint involves charges brought by three individuals at an aesthetics clinic that offered non-surgical cosmetic procedures. According to the complaint, the clinic maintained a number of policies that run afoul of the NLRA, including:

  • A confidentiality provision that expressly listed “salaries, bonuses, and compensation package information” in its scope;
  • An insubordination policy that prohibited disparaging statements about management or other employees;
  • A company communication policy that prohibited employees from making communications that could harm the “goodwill, brand, or business reputation” of the clinic;
  • A non-compete provision that imposed a two-year limitation on the employee’s ability to provide similar services within a 20-mile radius of the clinic, as well as a two-year limitation on customer and employee solicitation; and
  • An “Exit Agreement” that included an acknowledgment that damages for any violation of the non-compete, client non-solicit, and employee non-solicit amounted to, respectively tens of thousands of dollars in costs spent training the breaching employee (prorated under certain circumstances), $25,000 per solicited client, and $150,000 per solicited employee.

According to the complaint, several employees became dissatisfied with their work and left the company. Upon their resignations, the employer demanded that the departing employees all repay certain training costs, and the employees filed a slew of unfair labor practice charges, alleging, among other things, the maintenance of unlawful work rules. The allegations in the complaint regarding the restrictive covenants are limited to identifying the covenants and alleging that the clinic terminated one employee for refusing to sign the Exit Agreement “and to discourage employees” from engaging in concerted activity.

The Region investigated the charges, and has now issued a consolidated complaint, alleging that these restrictive covenants violate Section 8(a)(1) of the NLRA under the theory that such covenants tend to chill employees in the exercise of their Section 7 rights. The complaint also included references to several internal messages where supervisors allegedly demanded that employees refrain from discussing their compensation or their communications with management.

The Region appears to be building their argument that post-employment restrictive covenants somehow implicate Section 7 rights. To do so, Region 9 has set out an interesting first test case: as alleged in the complaint, certain of the employer’s policies seem to restrict discussions among employees relating to pay or employment conditions, which is unlawful. It’s possible that the General Counsel might leverage these allegedly unlawful policies (or other favorable facts) to extract concessions related to the clinic’s restrictive covenant program, or to argue that these policies collectively represent an unlawful limitation on employees’ Section 7 rights.

But it is unclear at this point whether the Act can be stretched to cover restrictive covenants for statutory “employees” under the National Labor Relations Act.[1] Indeed, the General Counsel only recently began to target the enforceability of restrictive covenants by way of a memorandum to the Regions. That memorandum, in turn, provides little detail regarding what legal theories (if any) grant the Board the authority to interfere with covenants that become effective only when the employment relationship between an employer and employee end. Even if the NLRB does have such authority, it bears recalling that the states have developed 50 separate bodies of law regarding their enforceability of restrictive covenants. To the extent the Board follows the General Counsel’s lead and finds the covenants at issue unlawful, the NLRB would wipe a large portion of that case law off the map (at least with respect to statutory employees).

Moreover, it’s also unclear whether the NLRB has the bandwidth and resources to litigate restrictive covenant cases. Setting aside whether the creation of two distinct bodies of law – one for supervisors excluded from the Act and one for statutory employees – makes sense, the Board has limited resources. As GC Abruzzo explained in her report to Congress last year, the Regions are already stretched thin with their current case load. Adding a whole new tranche of cases to their dockets, particularly ones that move very fast and are heavily litigated, would seem to be a bridge too far.

While we do not recommend that employers modify their restrictive covenant programs based on theoretical risk from the NLRB, this complaint is a good reminder that employers should examine whether they have legitimate business interests sufficient to support restrictive covenants under state law, especially for employees not working in a management or supervisor role. Risks are increasing for companies that universally impose broad restrictive covenants on employees, both under the NLRA and under state law.

And the decision also serves as a reminder that overbroad employee handbooks and policies regarding the confidentiality of compensation or employment conditions present significant risk where the NLRB is on much stronger statutory grounds. 

We will continue to monitor NLRB activity involving restrictive covenants, and employers with questions should reach out to their Seyfarth attorney.

[1] Most relevant to this post, the NLRA exempts supervisors from the definition of “employee.”

On September 1, 2023, California Governor Gavin Newsom signed legislation that furthers the state’s protections for employee mobility and seeks to void out of state employee non-compete agreements. Specifically, the new law provides that any contract that is void under California law is unenforceable regardless of where and when the employee signed the contract.

Under existing California law, non-compete agreements with California employees are typically void. California Business and Professions Code Section 16600 provides “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

The new law goes a step further and provides in Section 16600.5 to the Business and Professions Code:

(a) Any contract that is void under this chapter is unenforceable regardless of where and when the contract was signed.

(b) An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California.

(c) An employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under this chapter.

(d) An employer that enters into a contract that is void under this chapter or attempts to enforce a contract that is void under this chapter commits a civil violation.

(e)

(1) An employee, former employee, or prospective employee may bring a private action to enforce this chapter for injunctive relief or the recovery of actual damages, or both.

(2) In addition to the remedies described in paragraph (1), a prevailing employee, former employee, or prospective employee in an action based on a violation of this chapter shall be entitled to recover reasonable attorney’s fees and costs.

The law is effective January 1, 2024.

The findings in support of the new legislation are:

(a) Noncompete clauses in employment contracts are extremely common in the United States. Research shows that one in five workers are currently subject to a noncompete clause out of approximately 30 million workers nationwide. The research further shows that California employers continue to have their employees sign noncompete clauses that are clearly void and unenforceable under California law. Employers who pursue frivolous noncompete litigation has a chilling effect on employee mobility.

(b) California’s public policy provides that every contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind is, to that extent, void, except under limited statutory exceptions. California has benefited significantly from this law, fueling competition, entrepreneurship, innovation, job and wage growth, equality, and economic development.

(c) Over the past two decades, research on the harm of noncompete clauses and other contract clauses involving restraint of trade to pursue one’s profession has been accelerating. Empirical research shows that noncompete clauses stifle economic development, limit firms’ ability to hire and depress innovation and growth. Noncompete clauses are associated with suppressed wages and exacerbated racial and gender pay gaps, as well as reduced entrepreneurship, job growth, firm entry, and innovation.

(d) Recent years have shown that employers utilizing broad noncompete agreements attempt to subvert this longstanding policy by requiring employees to enter void contracts that impact employment opportunities once an employee has been terminated from the existing employer. Moreover, as the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees.

(e) The California courts have been clear that California’s public policy against restraint of trade law trumps other state laws when an employee seeks employment in California, even if the employee had signed the contractual restraint while living outside of California and working for a non-California employer.

(f) California has a strong interest in protecting the freedom of movement of persons whom California-based employers wish to employ to provide services in California, regardless of the person’s state of residence. This freedom of employment is paramount to competitive business interests.

Legal commentators have previously challenged the alleged factual underpinnings of some of these “findings.” The legislation was author sponsored and supported by Miravai LifeSciences, the California Employment Lawyers Association, and 46 law school professors.

Maravai LifeSciences, a supporter of this bill, explained that their “industry is heavily reliant on attracting top talent from across the country and around the world to continue driving innovation and economic growth. However, the use of noncompete clauses in employment contracts can hinder this process, preventing companies from recruiting the best candidates and limiting employee mobility. This is especially problematic in the biopharmaceutical industry, where the need for highly skilled workers with specialized knowledge is particularly acute.” Maravai further explained, the “use of noncompete clauses in employment contracts, can have a chilling effect on employee mobility and stifle economic development. Research has shown that noncompete clauses limit firms’ ability to hire and depress innovation, growth, and are associated with suppressed wages and exacerbated racial and gender pay gaps.”

While California has long separated itself from the majority of the country in its treatment of employee non-compete agreements as codified in Business and Professions Section 16600, the wrinkle in this new law is that attempts to interfere with employee non-compete agreements that may be valid under another state’s law. For example, an employee based in Florida bound by a non-compete agreement enforceable under Florida law may seek employment in California and the agreement would be considered void and enforceable under this California law. Further, an employee, former employee, or prospective employee may bring a private action to enforce the law for injunctive relief or the recovery of actual damages, or both. A prevailing employee, former employee, or prospective employee is entitled to recover attorney’s fees and costs.

The likely impact of this law is that companies may use the new California law to attempt to cleanse an out of state employee from an otherwise valid non-compete agreement under another state’s law by having the employee move to California to work. Further, the shear breadth and ambiguity of the language in the new legislation puts in question whether California based employers should ask their non-California based employees to enter non-competition agreements even if they are enforceable under the laws in which the employee works or resides. In other words, while the new law seeks to protect California employers and allow them to hire out of state employees bound by non-compete agreements in California, why should those same California based employers be permitted to use non-compete agreements with out of state employees and enforce those agreements out of state. Partisan state legislators and Governors outside of California may look to punish California for this new legislation. This is yet another example of the peculiarities of California and its activist legislature and Governor which causes some out of state employers and their counsel to lose their mind.

We expect that there will be legal challenges to the legislation, including Constitutional challenges, under the commerce clause, full faith and credit clause, and potentially the contract clause.

This new law is part of the recent push to attempt to ban or reform non-compete laws, which the FTC has shown an interest in banning on a nationwide basis.

To add to the labyrinth, there is also additional proposed California legislation AB1076 that would add additional “protections” including a notification requirement for California employers.

The bill states that it would codify “existing case law by specifying that the statutory provision voiding noncompete contracts is to be broadly construed to void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored, that does not satisfy specified exceptions. The bill would state that this provision is declaratory of existing law. The bill would make these provisions applicable to contracts where the person being restrained is not a party to the contract.”

This bill would also make it unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement, that does not satisfy specified exceptions. The bill would require employers to notify current and former employees in writing by February 14, 2024, that the noncompete clause or agreement is void, as specified. This bill would make a violation of these provisions an act of unfair competition pursuant to the UCL.

In light of these developments, California employers should review their employment agreements, offer letters, employee handbooks, and policies and remove any non-compete provisions that may continue to exist with their California employees, consult with legal counsel concerning the implication of this law on their out of state workers, ensure that their recruiting and hiring practices take into account the new legislation, and closely follow the new and proposed legislation coming out of California and any legal challenges that undoubtedly will occur.

Seyfarth partner Dawn Mertineit will be attending and presenting at the Intellectual Property Owners Association Annual Conference in Boston from September 10-12. This event brings together Intellectual Property professionals across law firms, corporations, service providers, and academia and offers educational programs, committee meetings, and networking opportunities.

Dawn will be speaking on a panel titled “Trade Secrets Under Pressure from the Winds of Public Policies.” The informational session will focus on newly enacted and proposed laws and regulations including the EU AI Act, EU Data Act, and TRIPS/WTO IP waiver, along with increasingly restrictive government policies that affect trade secrets. Dawn’s co-panelists are Kenneth Corsello from IBM and Tom Valente from the Intellectual Property Owners Association.

For more information and program registration details, visit the IPO website.

ibuki-tsubo-XV81dRUMzpo-unsplash

On May 11, 2011, Georgia passed the Restrictive Covenants Act, which made enforcing employee restrictive covenants far easier than it was under Georgia common law. In an odd twist, a law that Georgia intended to make it easier to enforce restrictive covenants has made it more difficult to enforce employee non-solicits. On June 13 2023, in North American Senior Benefits v. Wimmer, the Georgia Court of Appeals held that an employee non-solicit must include an express geographic restriction—a requirement that previously did not exist under Georgia’s common law regime. Employers should revise any restrictive covenant agreement accordingly to avoid a challenge to the enforceability of an employee non-solicit.

Under Georgia’s common law, the Georgia Court of Appeals squarely held that an employee non-solicit did not require a geographic or relationship-based restriction. And, even after the passage of the Restrictive Covenants Act, most employee non-solicits did not include a geographic restriction. Instead, agreements generally included a provision like the following:

During the term of Employee’s employment and for a one-year period following Employee’s separation from the Company, Employee shall not, directly or indirectly, solicit any employee of the Company to leave the Company’s employment or to join a competitive organization.

Some agreements, in a nod to the Act, added a limitation that the employee non-solicit would be limited to colleagues with whom the employee had material contact. Most agreements did not incorporate any reference to a geographic limitation—beyond a potential implied limitation based on where the company’s employees were located.

One year after Gallant, the court of appeals signaled that old Georgia law may not be the same as new Georgia law. Previously, under Georgia common law, the Court of Appeals issued a physical precedent only decision[1] where the majority opinion invalidated a customer-specific non-compete that did not include an express geographic limitation. The court of appeals reasoned that the Act required a “reference” to a geographic area limitation, and failing to include that limitation meant the restriction was void.

The decision drew a dissent from Judge Ray—now on the federal bench—who asserted that a customer-based non-compete met the statute’s geographic requirement because the covenant was limited to customers with whom the employee worked, so the “lack of a geographic area restriction is of no consequence.”

In another 2-1 decision, the court of appeals in North American Benefits expanded the geographic area requirement to employee non-solicits. The court of appeals pointed to the definition of “restrictive covenant” in the Act, which included an agreement to protect a business’s interest in confidential information, customers, and employees. Because the Act classified an employee non-solicit as a “restrictive covenant,” the employee non-solicit must be “reasonable in scope, time, and geographic limitation.” The employee non-solicit did not contain a geographic area limitation, so it was unenforceable to the extent it restricted post-employment conduct.

The court of appeals also confirmed that the Act permits a court to “blue pencil” a covenant to strike out overbroad language, but it does not authorize a court to equitably reform a covenant by revising or inserting a restriction.

Key Takeaways

Georgia employers should revise their employee non-solicits to include an express geographic area limitation. Employee non-solicits without this limitation will be found unenforceable barring an intervening decision from the Georgia Supreme Court or rehearing at the Georgia Court of Appeals. On July 17, 2023, North American Senior Benefits filed a certiorari petition with the Georgia Supreme Court, so the court of appeals’ decision may not be the last word here. But given the potential consequences if the decision stands, employers should be proactive and review their employee non-solicits and incorporate an express geographic area limitation.

Additionally, the decision serves as a reminder that restrictive covenants should be drafted in a manner that will allow a court to “blue pencil” the restriction into an enforceable form if it is found to be overbroad.

[1] In Georgia, decisions issued as “physical precedent only” are not binding precedent but are considered persuasive authority. 

john-schnobrich-FlPc9_VocJ4-unsplash (1)

On July 10th, the European Commission issued its Implementing Decision regarding the adequacy of the EU-US Data Privacy Framework (“DPF”). The Decision has been eagerly awaited by US and Europe based commerce, hoping it will help business streamline cross-Atlantic data transfers, and by activists who have vowed to scrutinize the next framework arrangement (thereby maintaining their relevance). Regardless of the legal resiliency of the decision, it poses an interesting set of considerations for US businesses, not the least of which is whether or not to participate in the Framework.

For those who followed the development and demise of the Privacy Shield program and the Schrems II case, it has been apparent for some time that the fundamental objection of the activists and the Court of Justice of the EU (“CJEU”) to the original Privacy Shield was the perception that the US intelligence community had an ability to engage in disproportional data collection without any possibility of recourse by EU residents whose personal information may be swept into an investigation. The actual functioning of the program for the certifying businesses were much less controversial.

Since the structure of the program wasn’t the primary reason for Privacy Shield’s revocation, from a business perspective, the current DPF looks a lot like the old Privacy Shield. For businesses who made the decision to participate in the Privacy Shield program in the past, the operational burden shouldn’t be much different under the new DPF, if they have already taken steps to operationalize the requirements.

What is interesting about the new DPF is how it may impact a company’s decision to choose  between the Standard Contractual Clauses (“SCCs”) and the alternative adequacy mechanism for transfers. There is also some interest vis-à-vis the DPF and its interactions with state privacy laws.

DPF v. SCCs

One of the components of the new SCCs that were adopted in 2021 (which did not exist in the prior version of the SCCs) is the requirement for all SCCs to be accompanied by a transfer impact assessment (“TIA”)[1]. A TIA is designed to assess whether there are legal barriers to the enforcement of the SCCs in the relevant importing jurisdiction – in this case, the US. Many commentators, and some courts, have applied the Schrems II reasoning to argue that use of the SCCs as a transfer mechanism to the US is not effective in all circumstances, because the Foreign Intelligence Services Act (“FISA”) authorizes US intelligence to engage in bulk collection under section 702 and such programs are not proportional and do not have reasonable safeguards required under EU law.

Although the SCCs are still used to transfer European data to the US (mostly because after Privacy Shield was invalidated, practically speaking, they had been the only remaining transfer mechanism for many businesses), several commenters have taken the position that, if Schrems II is taken to its logical conclusion, then any use of SCCs in the US is effectively impossible, because US companies cannot live up to their promises in the SCCs. This was noted in an expert report commissioned by the German Conference of Independent Data Protection Supervisors to assess the broad reach of FISA section 702 programs. Needless to say, companies who undertake a TIA as part of their deployment of SCCs are also under some level of uncertainty as to the effectiveness since a TIA is not the opinion of a supervisory authority, but rather their own interpretation, and that of their legal counsel – which said expert report may cast doubt on.

The DPF is not plagued by such uncertainty. Specifically, recital 200 of the Decision expressly states the legal protections surrounding FISA programs are adequate and “essentially equivalent” to EU protections related to intelligence and national security. This is a momentous declaration, in our estimation, because as a consequence, participation by a company in the DPF seems to remover the need for a TIA for a transfer mechanism. Put another way, the recital 200 provides binding authority for the assertion that the primary motivation for a TIA (i.e. FISA section 702 programs) is now moot in that the DPF participants have sufficient safeguards (even in light of FISA 702) regardless of undertaking a TIA. Note that the removal of a TIA requirement only works for participants in the DPF and TIAs are still required when relying on the  SCCs as a transfer mechanism.

DPF v. State Law

Because the DPF establishes “essentially equivalent” controls for participants, the differences between the scope and requirements of EU privacy law and US state privacy law are brought into more apparent contrast. Looking across the two general frameworks, the differences in concepts, protective requirements, and other controls may actually motivate businesses who are already subject to the various state omnibus privacy laws, to skip participation in the DPF. This is mostly because the DPF is a bit more reasonable to businesses with respect to the exercise of individual rights than some state laws.

For example, the GDPR does not require the controller to comply in full with an access request if the response would “adversely affect the rights” of others, including, a business’ trade secrets or intellectual property[2]. The California Consumer Privacy Act has no such express limitation related to business’ data. That being said, there are a number of possible arguments available under other laws (trade secret, confidentiality obligations, etc.) that could justify a limiting a response to an access request. However, those limitations are not express in the California law – and they are in the GDPR and the DPF.

Similarly, the principles in the GDPR and DPF allow for a denial of an access request where responding to such request triggers an undue burden on the business. The California law’s limitation is a bit narrower than the GDPR/DPF limitation in this instance. California requires responsive disclosures to access requests unless the request is “manifestly unfounded or excessive” [3]. This standard narrower than the DPF standard of “…where the burden or expense of providing access would be disproportionate to the risks to the individual’s privacy…”[4].

Conclusion

This lack of alignment between DPF requirements and state law may lead to operational  confusion and uncertainty by US businesses interested or actively involved in the transfer of personal information from the EU. Regardless of the confusion related to the overlapping US and EU privacy laws, businesses who have previously participated in and are familiar with the Privacy Shield program may find it useful to also participate in the DPF. Additionally, for some business models, participation in the DPF can mean reduced administrative and legal costs as compared to putting in place and maintaining SCCs. However, it must be remembered that the DPF is not the same as compliance with US state privacy laws – even though some omnibus state privacy laws echo GDPR concepts. There are significant distinctions which have to be managed between the tactical implementation of a privacy program for US state law and a DPF compliance program.

Finally, even though there has been a commitment by some to challenge the DPF at the CJEU, the Commission’s approval of the DPF does not necessarily signal a “wait and see” approach. It is instead a time for companies to carefully evaluate and review their transfer activities, their regulatory obligations, and the most appropriate path forward.  All these years after Schrems II, it is at least nice to have a potential alternative to SCCs, in the right business conditions.

[1] Commission Implementing Decision (EU) 2021/914 Recitals 19 through 21

[2] GDPR, Article 15(4) and Recital 63.

[3] Cal. Civ. Code 1798.145(h)(3)

[4] Commission Implementing Decision for DPF Annex I, Section III.4; 8.b, c, e; 14.e, f and 15.d.

jp-valery-mQTTDA_kY_8-unsplash

At the beginning of the pandemic, concerns were raised that trade secret misappropriation might take a new form. Indeed, with large swaths of the workforce working from home, spouses, roommates, or others living in the same area had an increased opportunity to purloin confidential information that might not have been available to them previously.

But a recent case in Massachusetts highlights that this is not unique to pandemic-era work-from-home setups. While the events forming the basis of the dispute in BioPoint, Inc. v. Dickhaut et al. occurred during the pandemic, the facts reveal that information sharing between employees of competitors can happen even in traditional settings.

In BioPoint, the plaintiff employed non-party Leah Attis, who was engaged to defendant Andrew Dickhaut. Dickhaut was managing director for the newly opened Boston office of defendant Catapult Staffing, LLC, which like BioPoint, provides consulting services and recruits short-term labor for its clients. Initially, Catapult did not make placements in the life sciences industry, instead focusing on the tech, light industrial, accounting, and finance industries. Despite having had “little, if any” experience in the life sciences and pharma industries (in contrast with BioPoint, whose employees had years of life sciences recruiting experience), Catapult decided to explore those industries in 2018.

At trial, BioPoint introduced evidence that Attis had repeatedly shared proprietary BioPoint information with Dickhaut at his request, including pricing information, candidate information (including their bill rate and pay rate, which are highly confidential), and even internal notes on client agreements. Using this information, Dickhaut approached prospective BioPoint clients to successfully pitch Catapult’s services, and proposed candidates to those clients whose information he was only aware of from Attis—despite BioPoint’s warnings to Attis not to share such information with Dickhaut. In one case, a BioPoint recruiter was about to make a placement for a medical director at a BioPoint client, only for Catapult to lure the candidate away for its own client placement, offering the candidate a better rate for her services—information which Dickhaut obtained from Attis.[1] As a result, the jury awarded BioPoint over $300,000 in damages based on misappropriation of trade secrets and tortious interference.

Following the jury trial, the judge conducted a bench trial on BioPoint’s remaining claims for unjust enrichment and violation of Massachusetts’ unfair and deceptive acts and practices statute, known in the Commonwealth as Chapter 93A. Ultimately, the court determined that “the jury’s verdict amply [on both misappropriation of trade secrets and tortious interference] supports a determination that Catapult violated Chapter 93A” through its agent, Dickhaut. Specifically, the court found that “Dickhaut’s conduct and culpable state of mind is imputable to Catapult as his employer under the long-established principles of vicarious liability,” and awarded BioPoint treble damages jointly against both Dickhaut and Catapult, resulting in a total damages award of over $5 million. Additionally, under Chapter 93A, BioPoint was entitled to recover its reasonable attorneys’ fees (over $2.5 million), for a total award of more than $7.5 million, plus pre- and post-judgment interest.

This decision (and the accompanying eye-popping damages award) serve as a reminder that employees must be advised of the need to keep an employer’s trade secrets and other proprietary information strictly confidential, including from their friends and family members—and should also be advised of the consequences for failing to do so. Even with BioPoint’s warnings to Attis, she still shared information with Dickhaut that permitted Catapult to develop relationships with BioPoint prospects and to make placements that otherwise would have likely been made by BioPoint. Employers must remain vigilant and take appropriate measures to protect its proprietary information from being shared by employees. While BioPoint is surely pleased with the verdict, it no doubt wishes it had been able to prevent the misappropriation to begin with and avoid the headache of a lengthy federal suit.

[1] Perhaps unsurprisingly, upon learning of her conduct, BioPoint fired Attis, who subsequently joined Catapult.

mari-helin-ilSnKT1IMxE-unsplash (1)

The D.C. Circuit recently held that a “Mutual Non-Disparagement” clause requiring an employer to “direct” its employees not to disparage a former employee could reasonably be interpreted as prohibiting the employer itself from making disparaging statements.

In Wright v. Eugene & Agnes E. Meyer Foundation, Dr. Terri Wright, a former employee of the Eugene and Agnes E. Meyer Foundation (the “Foundation”), filed suit against the Foundation after discovering its CEO, Nicola Goren, had made disparaging statements about her.

The Foundation hired Wright in early February 2018 as its Vice President of Program and Community.  During Wright’s tenure, Goren criticized her “interpersonal skills” and identified “communication issues.” In October 2019, Goren fired Wright, citing the same concerns.  Wright believed these alleged issues were pretextual, but to attempt to avoid litigation, she entered into a Severance Agreement with the Foundation. The Severance Agreement contained a provision titled “Mutual Non-Disparagement” that read as follows:

You agree that you have not made, and will not make, any false, disparaging or derogatory statements to any person or entity, including any media outlet, industry group or financial institution, regarding the Foundation or any of the other Releasees, or about the Foundation’s business affairs and/or financial conditions; provided, however, that nothing herein prevents you from making truthful disclosures to any governmental entity or in any litigation or arbitration. Likewise, the Foundation will direct those officers, directors, and employees with direct knowledge of this revised letter agreement not to make any false, disparaging or derogatory statements to any person or entity regarding you; provided, however, that nothing herein prevents such individuals from making truthful disclosures to any governmental entity in litigation or arbitration.

Continue Reading D.C. Circuit Holds Contractual Clause Directing Non-Disparagement Implies Employer Itself Cannot Disparage
romain-dancre-doplSDELX7E-unsplash (5)

On May 31, 2023, a Harris County Texas District Court jury found a telecom company acted in bad faith by filing a $23 million trade secret misappropriation lawsuit against a rival where the underlying technology was found to not actually be a trade secret.

Background & Analysis

In February 2019, Telecom firm Teligistics, Inc. (“Teligistics”) sued its rival Advanced Personal Computing, Inc. d/b/a Liquid Networx (“Liquid Networx”) and company executives Travis Wood and Robert Short, alleging they misappropriated trade secrets concerning its online platform for handling contracts named Telibid. Specifically, Teligistics alleged a former Liquid Networx employee obtained a copy of Teligistic’s internal Request for Proposal (“RFP”) in order to “tweak” Liquid Networx’s internal RFP, rather than spending time and resources developing their own RFP. 

Continue Reading Not All Documents Labeled Confidential Actually Are: Texas Jury Finds $23M Trade Secret Case Was Brought in Bad Faith
simon-abrams-k_T9Zj3SE8k-unsplash (1)

In Seyfarth’s third installment in the 2023 Trade Secrets Webinar Series providing valuable insights into navigating this evolving landscape, Seyfarth attorneys covered a range of topics, including the latest technology threats, the importance of communication and training, revisiting confidentiality policies, alternative trade secret protections, and updating restrictive covenant agreements. Here are the key takeaways from the Seyfarth webinar:

  1. Staying Informed about Technology Threats: Employers must stay up to date with the latest technology employees can use to misappropriate sensitive data. This includes being aware of potential tools and methods that could compromise trade secrets. Equally important is keeping abreast of advancements in technology that can help detect and prevent such misappropriation. By staying informed, organizations can proactively address emerging threats to their trade secrets.
  2. Communication and Training for Trade Secret Protection: Regular communication and training are critical in ensuring that employees understand the significance of treating proprietary information with extreme care. The webinar emphasized the need for clear and consistent messaging about the value of trade secrets and the consequences of mishandling them. By fostering a culture of awareness, organizations can strengthen their employees’ commitment to protecting trade secrets.
  3. Revisiting Confidentiality Policies for Remote Work: The shift to remote work necessitates revisiting confidentiality policies and practices. Organizations must ensure that their policies address the unique circumstances of virtual and hybrid work environments. This includes reviewing remote access protocols, data encryption methods, and guidelines for secure information sharing. Adapting confidentiality policies to the remote work setting helps safeguard trade secrets effectively.
  4. Implementing Alternative Trade Secret Protections: Given the current legislative and regulatory activity surrounding non-compete agreements, organizations should explore additional trade secret protections. The webinar emphasized the importance of implementing confidentiality training, policies, and agreements. Regular audits to track trade secrets and limiting access to only those who need it for their job responsibilities were highlighted as crucial measures to mitigate risk.
  5. Updating Restrictive Covenant Agreements: To comply with evolving state and federal laws, organizations should review and update all restrictive covenant agreements. Ensuring that these agreements are narrowly tailored and legally compliant is essential. By keeping restrictive covenants in line with the latest legal requirements, organizations can strengthen their trade secret protections while mitigating potential legal risks.

This webinar shed light on the critical aspects of safeguarding trade secrets in the evolving remote work landscape. By staying informed about technology threats, fostering communication and training, revisiting confidentiality policies, implementing alternative trade secret protections, and updating restrictive covenant agreements, organizations can effectively protect their valuable intellectual property. These takeaways provide a roadmap for organizations to navigate the unique challenges of managing trade secrets in a remote work environment while staying compliant with legal obligations.

You can view a recording of the webinar and all other webinars in our Trade Secrets & Non-Competes Webinar Series here.

steven-abraham-7WYR6LTp-po-unsplash

On January 1, 2022, the latest amendments to the Illinois Freedom to Work Act (“Act”) became effective. As we previously described, that Act sets forth various requirements governing restrictive covenant agreements in Illinois. Among other things, the Act codified the so-called Fifield Rule by defining adequate consideration for enforcement of a restrictive covenant to be either two years of employment or some other consideration, such as “additional professional or financial benefits.”

Not surprisingly, what are sufficient “additional professional or financial benefits” remains an open question. However, one recent appellate opinion from the Third Appellate District provides helpful instruction regarding the need to specifically identify the “additional professional or financial benefits” in any restrictive covenant agreement. In Midwest Lending Corp. v. Horton, 2023 IL App (3d) 220132, the Appellate Court affirmed the trial court’s dismissal of the plaintiff’s complaint pursuant to which the plaintiff sought to enforce certain post-employment restrictive covenants. The defendant, who was employed for only seven months, challenged the enforceability of the restrictive covenant agreement because he was not employed for at least two years and received no other consideration. In response, plaintiff relied upon a $25,000 sign-on bonus that defendant received as part of his offer letter and claimed that this bonus was “adequate consideration.” The court disagreed because the offer letter never identified the restrictive covenant agreement nor any of its terms. As such, the plaintiff failed to demonstrate that the bonus was consideration expressly provided in exchange for the defendant agreeing to the terms of the restrictive covenant agreement.

While Midwest Lending’s ruling was based on common law and not a construction of the Act, employers who opt to provide additional consideration to enforce restrictive covenant agreements should take care to explicitly identify the “additional professional or financial benefits” provided in exchange for the employee’s acceptance of the restrictive covenants.