Seyfarth Synopsis: While New York State failed to pass a non-compete ban last year, a new bill in the New York City Council would eliminate non-compete agreements entirely, presenting new challenges and considerations for employers in the Big Apple.

On December 12, 2023, the New York State Legislature delivered a bill for the Governor’s signature that would have banned “any agreement, or clause contained in any agreement, between an employer and a covered individual that prohibits or restricts such covered individual from obtaining employment, after the conclusion of employment with the employer included as a party to the agreement.” Governor Hochul vetoed that bill on December 22, 2023, and thus far there has been no further activity on this subject in the new Legislative term.

Stepping into the breach, two members of the New York City Council introduced a bill on February 28, 2024 that would ban all current and future non-compete agreements in the Big Apple. The bill broadly applies to “an agreement between an employer and a worker that prevents, or effectively prevents, the worker from seeking or accepting work for a different employer, or from operating a business, after the worker no longer works for the employer.” The bill defines “worker” to include independent contractors and specifies that it is unlawful to merely attempt to enter into a non-compete agreement with any worker.

Continue Reading NYC Council Proposes Broad Non-Compete Ban

In the ever-evolving digital landscape as well as legislative and regulatory changes and proposed changes to the use of non-competes, the preservation of trade secrets stands as a cornerstone for businesses striving to secure a competitive edge. As we continue to navigate the complexities of remote work and the jurisdictional differences in restrictive covenant enforcement, the safeguarding of these invaluable assets becomes not only essential but increasingly paramount.

In this session, Kate Perrelli, Dan Hart, and Cat Johns unravel the intricate relationship between non-compete agreements and employee mobility, with a specialized focus on the perspectives crucial to HR professionals and In-House General Counsel.

Here are the key takeaways from the webinar:

  • The post-COVID workplace poses increased risks to companies’ trade secrets and other confidential information as remote work appears to be here for good.
  • The crackdown on employee non-compete agreements at the federal and state level poses additional risks to employers posed by employees moving to competitors, with the pending FTC proposed rule on non-competes, enforcement activities by the NLRB, and state legislatures continuing to ban or curtail use of non-competes
  • Given the uncertainty around non-competes, companies should consider a variety of measures to protect their critical assets, including other tailored agreements, regularly updating policies and procedures, implementing training programs, reminding employees of the company’s policies and protocols, and implementing technological protections and monitoring of employee IT resources

To view the webinar recording, click here.

It should come as no surprise to readers of our blog that restrictive covenants are facing significant headwinds. The last decade or so has seen significant limitations on such agreements—mainly non-competes, but also other restrictive covenants such as customer and employee non-solicits and even non-disclosure agreements. These limitations—or proposed limitations—have come in a variety of forms; for example, many states have enacted so-called low-wage bans and choice of law and forum restrictions. They’ve also come from several corners: state legislatures (although not all have been successful), the FTC (which is expected to announce a final rule in April), the NLRB, and good ole’ fashioned court decisions.

Less than 5 years ago, Maine joined the fun by limiting the use of non-competes substantially. Now, the legislature is looking to take it even farther. Yesterday, the House of Representatives of the state lovingly known as “Vacationland” voted to send the vast majority of non-competes on a permanent vacation, assuming colleagues in the Senate and the governor agree.

Specifically, where Maine’s previous law limited the use of non-competes to those earning wages above 400% of the federal poverty level, H.P. 951 would amend the 2019 law to ban all non-competes in the employment context. The very limited exceptions to the ban are as follows:

(A) A seller of a business in this State may be bound by a noncompete agreement prohibiting the seller from opening a competing business in the same geographic area as the business that was sold;

(B) A shareholder in a limited liability company organized under the laws of this State may be bound by a noncompete agreement if the shareholder sells or disposes of all of the shareholder’s shares; or

(C) A member of a partnership organized under the laws of this State may be bound by a noncompete agreement if the partnership is dissolved.

The bill would also invalidate any non-compete between an out-of-state employer and a Maine resident, and it would further invalidate an out-of-state choice of law “if it violates [Maine’s] public policy” as set forth in the new bill. Finally, H.P. 951 dictates that the Department of Labor shall create a poster containing the non-compete laws, which employers must post in a “central workplace location,” and must be printed “in a minimum font size, as determined by the Department of Labor, in accordance with provisions of law governing disability-related accommodations.” Like the current law, the bill states that an employer who violates its provisions commits a civil violation, for which a minimum fine of $5,000 “may be adjudged,” and further notes that the Department of Labor has the authority to impose such fines.

It remains to be seen if the Maine Senate will vote in favor of H.P. 951, and if Governor Mills will sign it into law. Some good news for employers with workers in Maine is that should the bill become law, it will only apply to agreements “entered into or renewed” (my emphasis) on or after its effective date. In the meantime, while we wait to hear more, such employers may want to ask their key Maine employees to sign appropriate restrictive covenants agreements, if they haven’t already.

The National Labor Relations Board (“NLRB”) sent shockwaves through the employment landscape when General Counsel Jennifer Abruzzo took the position that the “proffer, maintenance, and enforcement” of restrictive covenants could violate Section 7 and Section 8(a)(1) of the National Labor Relations Act (“NLRA”). As we previously blogged, the NLRB seemingly took the position that non-competes typically violate Section 8(a)(1) of the Act, which makes it an unfair labor practice for an employer to interfere with an employee’s Section 7 rights. We also noted that this theory could wreak havoc on routine employee departure litigation by creating a turf war between the court system and the NLRB.

But a recent memorandum provided by the Division of Advice to a regional office suggests that the NLRB’s antagonism towards non-competes may be more limited in practice. The memorandum addressed a fact pattern common to readers. An employee had an agreement with a company that placed restrictions on the employee’s ability to solicit or accept business from the company’s customers, to disclose confidential information, and to have competitive employment during the term of employment.

Continue Reading Is the NLRB’s New Stance on Restrictive Covenants Mostly Bark With a Little Bite?

Love is in the air. With Valentine’s Day just around the corner, we’re writing to share some heartfelt news about a recent change in California law that might just make your heart skip a beat.

In the spirit of spreading love (and compliance), a new law, Section 16600.1 of the Business and Professions Code, has made it unlawful to include a non-compete clause in an employment contract or to require an employee to enter a non-compete agreement that doesn’t meet specified exceptions.

Now, here’s a Valentine’s Day twist: For current and former employees (from January 1, 2022), Cupid (or, in this case, the new law) requires employers to send a love letter, we mean, a written individualized communication to the impacted employee, by February 14, 2024. This heartfelt message should convey that any non-compete clause or agreement not meeting the exceptions is void.

What You Need to Do:

  1. Review existing employment contracts for non-compete clauses.
  2. Identify California current and former employees employed after January 1, 2022, who may be affected.
  3. Ensure compliance with the written notification requirement by February 14, 2024. Specifies the format of the notification as a written individualized communication to the last known address and email address.
  4. Evaluate changes to existing NDA and trade secret protection agreements.

In response to these changes, Seyfarth Shaw’s Trade Secrets, Computer Fraud, and Non-Compete practice group, in conjunction with our Project Management Professionals, has developed a proprietary process mapping and analysis tailored to guide clients in addressing the unique needs of your organization to address this lovely new law.

In the inaugural session of the 2024 Trade Secrets Webinar Series, our panelists meticulously examine pivotal legislation, landmark cases, and legal advancements spanning trade secrets and data theft, non-competes and restrictive covenants, and computer fraud on a national scale. Tailored specifically for general counsel, labor and employment counsel, IP counsel, and HR professionals, this webinar offers essential insights into trade secrets, non-competes and restrictive covenants, and computer fraud.

Here are the key takeaways from the webinar:

  1. Federal agencies continue to crack down on the use of non-compete covenants. The FTC moved forward with its proposed ban of non-competes with employees and we expect to see a formal rule released in mid-spring 2024. Legal challenges are expected. The NLRB’s General Counsel also released a memorandum signaling enforcement actions against companies using non-competes with their non-exempt workforce and we have seen at least one agency action thus far. We also saw proposed federal legislation banning or narrowing the use of non-competes, which we expect to be reintroduced in 2024. Lastly, we saw federal agencies insisting on broad whistleblower protections in confidentiality agreements with impacted employees and customers.
  2. State legislatures continued to narrow the use of the non-competes with employees. Minnesota adopted a ban on non-competes. California adopted two new law that further limit the use of restrictive covenants in California and require employers to provide notice to current and former employees (since January 1, 2022) by February 14, 2024 that any operative non-competes that they signed are void. California’s new law positions the state as a beacon on the hill for employees and California employers attempting to shed employee non-compete covenants that may be enforceable in other jurisdictions.
  3. We saw an increasing hostility towards restrictive covenants by certain judicial officers in the Delaware Chancery Court, including in cases involving employment and equity agreements with out-of-state executives, with a notable differing view in recent Delaware Supreme Court case, which reaffirmed Delaware’s deference to parties’ freedom to contract.
  4. We continued to see large trade secret verdicts and an increasing focus on novel trade secret damages theories. We saw notable decisions addressing the recovery of damages for non-U.S. sales under the Defend Trade Secrets Act and the recovery of unjust enrichment damages when damages for actual losses are not sufficient.

To view the webinar recording, click here.

Delaware has long been favored by businesses for many reasons, including its courts’ deference to parties’ ability to contract. Recently, however, the Delaware Chancery Court was seemingly less deferential to restrictive covenant agreements in circumstances outside of the traditional employment agreement context. In Cantor Fitzgerald, L.P. v. Ainslie, the Court, in a well-reasoned decision which arguably included a survey of this area of law, analyzed restrictive covenants in a partnership agreement that, if breached, resulted in the forfeiture of economic rights by former partners. Cantor Fitzgerald argued that such provisions were conditions precedent to payment and were not subject to a review for reasonableness as a restrictive covenant. The Court disagreed, analyzed the restrictive covenants for reasonableness, and found the provisions unenforceable because the covenants were broader than necessary to protect the partnership or what is commonly referred to as a protectable business interest.

On January 29, 2024, however, the Supreme Court of Delaware, in another well-reasoned and expansive analysis reversed and remanded the Chancery Court’s order. See Cantor Fitzgerald, L.P. v. Ainslie, Case No. 162, 2023, 2024 WL 315193 (Del. Jan. 29, 2024). Similar to the Chancery Court, the Supreme Court weighed the policy interests of the freedom of competition against the freedom of contract embodied in the Delaware Revised Uniform Limited Partnership Act. But, unlike the lower court, the Supreme Court held that the policy interests of contractual flexibility outweighed the state’s interest in protecting competition and determined that the Chancery Court erred by “imposing its notion of reasonableness on the very provisions that, when enforced against other departing partners, redounded to the plaintiffs’ benefit during their tenure as partners.” Id. at *1.

While Cantor Fitzgerald involved a forfeiture-for-competition clause in a partnership agreement, the reasoning underlying the opinion – deference to parties’ freedom to contract – may have broader implications and may be argued that it also applies to shareholder agreements, long-term incentive plans, and similar agreements. Hence, businesses should consider this latest foray into non-compete law when strategizing legitimate ways to protect their business interests.   

We intend to closely follow how courts apply this most recent ruling and businesses are advised to consult with their counsel regarding how this opinion may affect their existing and prospective agreements.

Aegis Spine Inc. has agreed to pay $8,000,000 to fellow spinal implant manufacturer Life Spine Inc., following Life Spine’s suit in the Northern District of Illinois alleging Aegis had misappropriated Life Spine’s trade secrets to create a “knockoff” competitive implant.

Life Spine, based in Illinois, develops and manufactures medical devices aimed at treating various spinal disorders. Its principal line of products is its ProLift Expandable Spacer System, which consists of small implants inserted into the spinal disc. The ProLift is used to alleviate nerve pain and improve spinal alignment. Aegis is a medical device manufacturer and distributor headquartered in California.

In 2017, Life Spine entered into various agreements with Aegis by which Aegis would sell and distribute ProLift devices while maintaining as confidential all proprietary information related to the devices. Aegis would receive ProLift devices on loan in order to demonstrate them to prospective customers. In the summer of 2019, while the parties were negotiating a distribution agreement, Aegis terminated its relationship with Life Spine, a decision Life Spine described as “abrupt.”

Shortly thereafter, Life Spine uncovered what it deemed a “scheme” by Aegis to develop and sell “an almost identical” product to ProLift, a device called the AccelFix Lumbar Expandable Cage System. In investigating Aegis’s conduct, Life Spine discovered that, while negotiating the distribution agreement with Life Spine, Aegis filed a 510(k) premarket notification with the Food and Drug Administration to begin marketing AccelFix, listing the ProLift as the “substantially equivalent” “Primary Predicate Device” for the product. Based on this “troubling evidence,” Life Spine contended that Aegis used Life Spine’s confidential information to create the AccelFix and purporting to continue negotiations with Life Spine only to cover up its wrongdoing.

Life Spine filed suit in October 2019, alleging Aegis had violated its agreements with Life Spine, committed fraud, and misappropriated Life Spine’s trade secrets under federal and state law. Litigation continued for years, with Aegis raising unsuccessful counterclaims.

On December 20, 2023, the parties filed a stipulated settlement agreement by which judgment would be entered in Life Spine’s favor, and Aegis would pay $8,000,000 to Life Spine by June 1, 2026. Should Aegis fail to pay the full amount, it could owe Life Spine up to $17,500,000. The settlement allows Aegis to restart sales of its existing inventory of implants, which had been prohibited per a March 2021 court order, though it may do so only for a year, only in territories outside the United States, and with no global advertising for the product.

Ultimately, the settlement presents a cautionary tale about the business and financial ramifications of misusing confidential information.

The Securities and Exchange Commission (“SEC”) levied an $18 million fine against J.P. Morgan Securities, LLC (“JPMS”) for allegedly including overbroad release provisions in settlement agreements. This marks the continuation of its recent activity to enforce SEC Rule 21F-17(a), a regulation that prohibits companies from taking any action to impede or discourage whistleblowers from reporting suspected securities violations to the SEC.

The rule broadly prohibits any person from taking any action to prevent an individual from contacting the SEC directly to report a possible securities law. Specifically, the rule provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

However, Rule 21f-17(a) does not create a private right of action. And, as we previously blogged, the SEC historically had limited enforcement activity for Rule 21F-17(a), with roughly 14 enforcement actions between 2015 and 2021. Many of those enforcement actions occurred in the context of alleged retaliation by a company against an employee for communicating with the SEC, or attempting to impede an employee’s ability to communicate with the SEC as part of an investigation.

But with the 2020 change in administration, the SEC began making up for lost time and—most importantly—initiating enforcement actions based solely on contractual language in confidentiality agreements or severance agreements that did not specifically carve out the ability for the signatory to affirmatively communicate with the SEC about potential securities violations.

JPMS Consent Order

According to the consent order, from 2020 through July 2023, JPMS included language in certain release agreements where the counterparty (brokerage or advisory clients) agreed to keep the release payment confidential and “not use or disclose (including but not limited to, media statements, social media, or otherwise) the allegations, facts, contentions, liability, damages, or other information relating in any way to the [client’s] Account, including but not limited to, the existence or terms of this Agreement.” The confidentiality language included a fairly standard exclusion that carved out responding “to any inquiry about [the] settlement or its underlying facts by FINRA, the SEC, or any other government entity or self-regulatory organization, or as required by law.”

The SEC took the position that this confidentiality language still violated Rule 21f-17(a), because the counterparty could only respond to requests for information from certain government agencies, but the exclusion did not specifically preserve the right to affirmatively report potential violations of securities laws to the SEC.

As part of the order, JPM agreed to pay an $18 million fine and to cease and desist from any further violations of Rule 21f-17(a). In recent consent orders, the SEC normally included a notification requirement and obligation to revise non-compliant agreements. Neither was required here because, after the SEC notified JPMS about this investigation, JPMS affirmatively revised its contract language and informed the 362 impacted clients that they were not prohibited from voluntarily or otherwise communicating directly with or providing information to any governmental or regulatory authority about the information leading to the settlement agreement or any other potential violation of securities law.

In the accompanying press release, SEC Enforcement Director Gurbir Grewal reiterated the rule’s breadth and proclaimed, “Whether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing.” Another SEC official also commented that “[t]hose drafting or using confidentiality agreements need to ensure that they do not include provisions that impede potential whistleblowers.”

Takeaway

Companies should take care to ensure that any confidentiality restriction does not prevent an individual from affirmatively contacting the SEC to report potential wrongdoing. Government agencies like procedural violations, and the SEC is no different. Under the SEC’s interpretation, a violation of Rule 21f-17(a) is as simple as finding a non-conforming provision, then adjusting the monetary penalty and notice requirements accordingly. The SEC has shown a renewed interest in enforcing this rule and, as its enforcement actions continue, the agency will likely use its prior actions to characterize any potential suppression as a willful violation.

Tuesday, February 20, 2024
2:00 p.m. to 3:00 p.m. Eastern
1:00 p.m. to 2:00 p.m. Central
12:00 p.m. to 1:00 p.m. Mountain
11:00 a.m. to 12:00 p.m. Pacific

REGISTER HERE

About the Program

In the ever-evolving digital landscape as well as legislative and regulatory changes and proposed changes to the use of non-competes, the preservation of trade secrets stands as a cornerstone for businesses striving to secure a competitive edge. As we continue to navigate the complexities of remote work and the jurisdictional differences in restrictive covenant enforcement, the safeguarding of these invaluable assets becomes not only essential but increasingly paramount.

Seyfarth is thrilled to extend an invitation to you for the second installment of our dynamic 2024 Trade Secrets Webinar Series, presented by our Trade Secrets, Computer Fraud, and Non-Compete Practice. In this session, Kate Perrelli, Dan Hart, and Cat Johns will unravel the intricate relationship between non-compete agreements and employee mobility, with a specialized focus on the perspectives crucial to HR professionals and In-House General Counsel.

Key Highlights:

  • Strategic HR Alignment: Gain insights into aligning non-compete agreements and other restrictive covenants with HR practices to fortify trade secret protection in remote work.
  • Remote Work Risk Mitigation: Explore unique risks tied to remote work and discover proactive strategies for steadfast trade secret protection under General Counsel guidance.
  • Tailored Solutions for Professionals: Delve into effective strategies tailored for HR and General Counsel, navigating the dynamic landscape of remote work for organization-specific trade secret safeguarding.
  • Practical Insights: Acquire actionable best practices and practical insights for HR and General Counsel teams, equipping them with essential tools for trade secret management and preservation.

Speakers

Kate Perrelli, Partner, Seyfarth Shaw LLP

Dan Hart, Partner, Seyfarth Shaw LLP

Cat Johns, Associate, Seyfarth Shaw LLP


If you have any questions, please contact Sadie Jay at sjay@seyfarth.com and reference this event.

This program is accredited for CLE in CA, IL, and NY. Credit will be applied as requested but cannot be guaranteed for TX, NJ, GA, NC and WA. The following jurisdictions may accept reciprocal credit with our accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, AR, CT, HI and ME. The following jurisdictions do not require CLE, but attendees will receive general certificates of attendance: DC, MA, MD, MI, SD. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used for self-application. Please note that attendance must be submitted within 10 business days of the program taking place. CLE decisions are made by each local board and can take up to 12 weeks to process. If you have questions about jurisdictions, please email CLE@seyfarth.com.

Please note that programming under 50 minutes of CLE content is not eligible for credit in NJ, and programming under 60 minutes of CLE content is not eligible for credit in GA. Programs that are not open to the public are not eligible for credit in NC.