On March 21, 2024, the Federal Deposit Insurance Corporation (“FDIC”) approved a Federal Register notice seeking public comment on its proposal to revise its current Statement of Policy on Bank Merger Transactions. Among the proposed revisions, the agency’s proposal will prohibit non-compete agreements in bank mergers in which the selling bank is required to divest all or a portion of its business lines or branches.

The FDIC is one of three federal banking agencies charged with responsibility for evaluating bank transactions subject to Section 18(c) of the Federal Deposit Insurance Act, also known as the Bank Merger Act (“BMA”). The Bank Merger Act requires regulatory approval for any merger transaction involving an FDIC-insured depository institution (“IDI”), including mergers involving an IDI and any non-insured entity. Under the BMA, the federal banking agencies are prohibited from approving bank mergers that would have monopolistic effects as well as mergers that “do not constitute a monopoly, but that would nonetheless substantially lessen competition, tend to create a monopoly, or otherwise be in restraint of trade.”

To mitigate the potential monopolistic or anticompetitive effects of a bank merger, the FDIC has the authority to mandate that an institution divest certain of its business lines, branches, or portions thereof before allowing the merger to be completed. The FDIC’s proposed revisions to its statement of policy will also prohibit the selling institution from entering into non-compete agreements with any employee of the divested entity or from enforcing any existing non-compete agreements with any of those entities. The proposal is intended to “promote the ongoing competitiveness of the divested business lines, branches, or portions thereof.”

The FDIC’s current statement of policy addressing its process for reviewing proposed bank mergers was last amended in 2008. Since its last revision, the FDIC states, amendments to the BMA and changes to the banking industry and financial system have led to continued growth and consolidation that has spurred a significant reduction in the number of smaller banking organizations in favor of large and systematically important (read: “too big to fail”) banking organizations  and contributing to the need for an updated review of the applicable regulatory framework. The agency cites to the statistic that, at the end of 2023, IDIs with total assets in excess of $100 billion comprise less than one percent of the total number of IDIs, yet they hold approximately 71 percent of total industry assets and 68 percent of American deposits.

The current proposal does not include any bright lines or specific metrics to determine which transactions may be presumed anticompetitive, stating that it did so to “maintain flexibility to appropriately evaluate the facts and circumstances of act application filed.” However, the FDIC notes that it may consult with the Department of Justice on mergers it believes may raise anti-competitive concerns.

The FDIC’s proposed rule is just the latest in the ongoing trend of state and federal agencies’ attempts to curtail or outright ban the use of non-compete agreements for employees. As noted here and here, both the FTC and NLRB’s general counsel have weighed in on this issue, promulgating proposed rules and legal opinions seeking to ban non-competes nationwide.

Public comment on the FDIC’s proposal will remain open for 60 days after its publication in the Federal Register.

We invite you to watch our recent webinar, where Seyfarth Shaw LLP’s trade secret, computer fraud, and non-compete attorneys navigated the ever-evolving business landscape, safeguarding trade secrets has become a critical priority for organizations seeking resilience and success.

In this webinar, our trade secret presenters, Justin Beyer, Joshua Salinas, and Dallin Wilson, delved deeper into the intricacies of building a robust culture of confidentiality through innovative Employee Training Programs. This was not just a webinar; it was a pivotal discussion meticulously tailored to empower HR professionals and in-house counsel.

Here are the key takeaways from the webinar:

  • Companies should regularly review their restrictive covenant agreements as the statutory landscape continues to evolve. 
  • We continue to see new state-specific legislation regarding the use and enforcement of restrictive covenants, such as notice requirements, income thresholds, and protections for certain professions. 
  • Building a culture of confidentiality requires that employers consistently educate employees as to the company’s confidential and trade secret information through the employment relationship, and should include specific steps during the onboarding and off-boarding process.
  • Maintaining a culture of confidentiality includes training employees on what is confidential information and how to protect that information. It also includes entering into agreements with both employees as well as customers and third-party providers to ensure that information that the company discloses continues to be treated as confidential.

To view the webinar recording, click here.

As we reported at the end of February, Maine’s House of Representatives voted for a non-compete ban that would have invalidated virtually all such agreements in the state. In March, the Senate passed the bill, sending it to Governor Mills’s desk. Despite what looked like another victory for opponents of non-competes, Governor Mills vetoed the proposed ban, just as Governor Hochul of New York recently did.

In her veto, Governor Mills said that she vetoed the bill because she was not convinced that non-competes—which are already subject to statutory restrictions under Maine law—are a major problem. Mills further stated that non-competes can be “critical tools to prevent employees from taking unfair advantage of their former employers.” Notably, Mills also pointed out that the FTC is expected to announce a new rule regarding non-competes soon, and thus it would be “ill-advised” for Maine to weigh in at this time. While the legislature could overrule the governor’s veto with a two-thirds vote, it currently does not appear that proponents of the ban have the votes to do so.

So for now, reasonable non-competes are safe in Vacationland. We expect a final rule to be announced by the FTC any day now, so stay tuned on more developments on this page.

Effective January 1, 2020, Washington enacted a noncompete statute which, among other things, required employers to satisfy notice obligations and compensation thresholds to use noncompete agreements with employees and independent contractors. As we previously described, Washington’s original statute:

  • Requires advance notice of non-competes “no later than the time of the acceptance of the offer of employment,” and “independent consideration” for any non-compete entered after commencement of employment;
  • Only employees earning an annual salary exceeding $100,000, or independent contractors earning $250,000 (adjusted annually for inflation) can be bound by non-competes;
  • The employer must pay the employee’s base salary (less any compensation the employee earns elsewhere) during the restriction period if the employee is terminated, otherwise the agreement is unenforceable;
  • The new law includes a presumption (rebuttable by clear and convincing evidence) that non-competes with a duration longer than 18 months are unreasonable and unenforceable;
  • The new law includes a private right of action to persons who believe they are subject to a non-competition agreement in violation of the Act. Attorneys General can also bring an action on behalf of one or more persons. If a violation of the law is found, the employer must pay the higher of the actual damages or a statutory penalty of $5,000 plus reasonable attorney’s fees and related costs and expenses. This mandatory obligation to pay would apply if a court or arbitrator reformed, modified or only partially enforced a non-compete restriction.
  • The new law applies to agreements with franchisees as well, but the limitations are focused on only no-raid (i.e., nonsolicitation of employees) provisions; and
  • Non-competes must be governed by Washington law if the employee is “Washington-based,” and such individuals cannot be forced to litigate the non-compete outside of Washington state.

Effective June 6, 2024, certain amendments will become effective and have retroactive effect. Notably:

  • The definition of a “noncompetition covenant” will include “agreements that directly or indirectly prohibit the acceptance or transaction of business with a customer”;
  • The customer non-solicitation exception will be limited to “current” customer only, not former or prospective customers;
  • The employer’s obligation to provide notice of the terms of the noncompete is clarified to be before “initial oral or written” acceptance of an offer (vs. prior to “acceptance of employment”);
  • Non-parties to a noncompete agreement may now have standing to pursue claims under Washington’s statute against current or past employers who have imposed agreements in violation of the statute;
  • Any adjudication relating of a noncompete agreement must be litigated in Washington and under the substantive laws of Washington; and
  • A cause of action can be brought with respect to noncompetition covenants signed before January 1, 2020 if the covenant is being “explicitly leveraged.”

One last amendment is particularly notable regarding noncompetes entered into as part of a sale of business. Consistent with other states which impose some curtailment on employee noncompete agreement, Washington carved out noncompete agreements entered into as part of a sale of business from its statute. Effective June 6, that exception will be limited to owners who sell at least one percent of the business. The one percent threshold stands in notable contrast to the FTC’s proposed threshold of a 25% ownership interest for the sale of business exception to apply. Particularly in certain high-growth sectors, key owners and business leaders often own less than 25% of a business, yet would impose significant risk to a buyer if allowed to compete. By allowing noncompetes generally and providing an exception to its statute based on a 1% threshold, Washington is taking a more pragmatic and business-centric view of noncompetes while still fostering its goal of employee mobility.

Employers in Washington are advised to review their noncompete agreements to ensure compliance with these new amendments.

Seyfarth proudly announced the annual installment of our Commercial Litigation Outlook and Webinar Series, featuring insights about litigation issues and trends to expect in 2024 from our nationally recognized team. The Trade Secrets practice group is pleased to present its 2024 outlook piece, “Guarding Secrets: Navigating the Shifting Landscape of Restrictive Covenants in 2024,” available here, along with a webinar focusing on the content and what to expect this year.

We invite you to join us on Thursday, April 11th for the second installment of the Commercial Litigation Outlook series, titled “Navigating Legal Minefields: Insights on Restrictive Covenants, eDiscovery, and Privacy Compliance.” Mark your calendars for this insightful session, where our panel will dissect the ever-evolving world of non-competes and trade secrets. Here’s a sneak peek at what we’ll cover:

  • Federal Attempts to Curb Non-Competes: Delve into the proposed FTC rule and the NLRB’s stance, analyzing their potential impacts and the legal challenges they may face.
  • State Initiatives: Uncover the latest legislative developments from states like California, Minnesota, and New York, examining how these changes could impact employers nationwide.
  • Judicial Scrutiny and Trends: Gain insights into recent court decisions regarding non-competes and confidentiality provisions, and understand their implications for businesses.
  • Regulatory Enforcement Surrounding Privacy Laws: Learn about the rising regulatory enforcement and litigation surrounding data privacy laws, including the impact of consumer awareness and state legislation on businesses.
  • Navigating the Risks of Privacy Litigation: Discover the latest developments in privacy litigation, including the surge in lawsuits related to website beacons, biometric data, and AI processing. Gain insights on compliance frameworks and preemptive risk assessments to mitigate litigation threats.
  • Advancements and Risks in eDiscovery Tools: Learn about the latest advancements in GenAI eDiscovery tools, including document summarization, subjective coding determinations, and GenAI syntax and querying. Understand the challenges and considerations of adopting GenAI in litigation, including defensible use of technology and negotiating discovery protocols.
  • Generative AI in eDiscovery Workflows: hear about the potential of Generative AI in eDiscovery workflows to streamline your business, increase productivity, and reduce inefficiencies amidst rising regulatory enforcement and litigation surrounding data privacy laws.
  • Moderator:
    Rebecca Woods, Partner, Seyfarth Shaw
  • Speakers: 
    Dawn Mertineit, Partner, Seyfarth Shaw
    James Yu, Senior Counsel, Seyfarth Shaw
    Jason Priebe, Partner, Seyfarth Shaw
    Matthew Christoff, Partner, Seyfarth Shaw

Whether you’re an in-house counsel, business owner, or legal professional, this webinar promises valuable insights to navigate the evolving legal landscape.

Register now to secure your spot in this illuminating session.

This blog has been cross-posted to Seyfarth’s Gadgets, Gigabytes & Goodwill site.

On March 4, the Federal Circuit, heard oral arguments for Celanese Int’l. v ITC, 22-1827 (Fed. Cir. 2024), a case that may reshape the dynamics between trade secrets and patent rights.

The Core Issue at Hand

This case centers around the America Invents Act (AIA) and whether a product’s prior sale by the patent applicant can disqualify the patenting of the method used to produce said product.

Case Background

Celanese perfected a novel method for producing acesulfame potassium (Ace-K), a synthetic sweetener. Opting to keep this process confidential, Celanese sold Ace-K for several years. Plot twist! They then filed for a patent more than a year after Ace-K hit the market.

Here’s where the story gets sweeter! Anhui Jinhe, a rival company, began importing Ace-K into the U.S., prompting Celanese to accuse Jinhe of infringing on their patent at the International Trade Commission (ITC). Jinhe contended that Celanese’s patent claims were invalid under the AIA’s “on-sale bar” rule, arguing that Celanese had already sold Ace-K produced by the disputed process over a year prior to their patent application. The ITC sided with Jinhe, asserting that a product’s sale made through a confidential process constitutes an “on sale” event under the statute, thus nullifying subsequent patent claims for that process. Celanese challenged this decision, sparking the current appeal.

Potential Consequences of the Case

Traditionally, inventors had to choose between patenting a new process or keeping it a trade secret. The “on-sale bar” served as a mechanism to prevent inventors from benefiting commercially from a secret invention for years before seeking a patent monopoly. However, this case challenges the interpretation of what it means for an invention to be “on sale” when the process itself is not directly marketed or disclosed.

Arguments from Celanese

Celanese argues that the AIA revises the pre-AIA rule, emphasizing the “claimed invention” rather than the “invention” at large, which should prompt a reevaluation of Federal Circuit precedent. They assert that their interpretation encourages the disclosure of trade secrets without unfairly extending exclusive rights.

Counterarguments from the ITC and Jinhe

In contrast, the ITC and Jinhe argue that the AIA did not alter the definition of “on sale.” They contend that Celanese’s interpretation is overly narrow and that the established pre-AIA rule should apply, preventing patentees from extending their monopolies through delayed patent applications on previously used secret processes.

Conclusion

This case is a sweet reminder of the intricate dance between protecting innovations and promoting fair competition. For those in industries dependent on trade secrets, such as pharmaceuticals, chemicals, and semiconductors, this case is crucial to watch, signaling possible shifts in how inventions are protected in the future. We’ll post an update when the court makes its ruling. The outcome may be the key ingredient to ensuring your inventions remain sweet and secure.

Wednesday, March 27, 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

As we navigate the ever-evolving business landscape, safeguarding trade secrets has become a critical priority for organizations seeking resilience and success. In this pursuit, Seyfarth is thrilled to extend a special invitation to the third installment of our highly acclaimed 2024 Trade Secrets Webinar series.

In this webinar, our trade secret presenters, Justin Beyer, Joshua Salinas, and Dallin Wilson, will delve deep into the intricacies of building a robust culture of confidentiality through innovative Employee Training Programs. This is not just a webinar; it’s a pivotal discussion meticulously tailored to empower HR professionals and in-house counsel.

Key Discussion Points:

  • Methods to Create a Culture of Confidentiality: Uncover innovative strategies to instill and nurture a culture of confidentiality within your organization. Explore how to seamlessly adapt these strategies to the dynamic landscape of hybrid and remote work, ensuring that confidentiality remains a steadfast pillar in the evolving workplace.
  • Best Practices for Onboarding and Offboarding Employees: Ensure the confidentiality thread is seamlessly woven throughout the employee lifecycle. Discover and implement best practices that not only secure your organization’s vital information during onboarding but also maintain a robust level of confidentiality throughout an employee’s journey, including offboarding protocols.
  • State Law Considerations for Restrictive Covenant Programs: Stay ahead of the curve by understanding the ever-evolving statutory landscape influencing restrictive covenant programs. Delve into the nuances of state laws and gain insights into how they shape and impact the implementation of confidentiality measures, providing your organization with a proactive approach to legal compliance and safeguarding trade secrets.

As a valued participant, you will gain exclusive insights into these key discussion points, empowering you with actionable strategies to elevate your organization’s security and resilience.

Speakers

Justin Beyer, Partner, Seyfarth Shaw LLP

Joshua Salinas, Partner, Seyfarth Shaw LLP

Dallin Wilson, Partner, 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.

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.