Along with 54 other lawyers and two paralegals from across the country, Seyfarth partners Kate Perrelli, Robert Milligan, and Erik Weibust recently signed a letter, penned by our friend Russell Beck, in response to President Biden’s July 9, 2021 Executive Order on Promoting Competition in the American Economy, which we previously wrote about. The letter, which was sent to the White House and Federal Trade Commission (FTC) on July 14, 2021, recommends that regulation of noncompete agreements be left to the states, which have been doing so for over 200 years. However, if the FTC were to attempt to regulate non-competes (which we question whether it even has the constitutional authority to do so—although that was not an issue addressed in the letter), the letter recommends that any rules be limited to addressing abuses and not broadly prohibiting non-competes:

In sum, … although sometimes abused, when used properly (as all of the signatories to this letter recommend) noncompetition agreements serve legitimate purposes that are important to the economy, and necessarily require a nuanced approach reflective of variations in jobs, industries, and state economies. … [A]s one of the leading professors on the subject observed, that the current research fails to “isolate random variation in the use of non-competes” that would be necessary to establish noncompetition agreements as the cause of negative outcomes. Accordingly, … [A]ny regulatory efforts should proceed with caution, understand the limitations of the existing research, and avoid adverse unintended consequences.

We will continue to monitor the Biden Administration’s and the FTC’s efforts to regulate non-competes and will provide updates as they become available.

On Monday, July 19, 2021, Houston partner Jesse Coleman and Boston partner Erik Weibust are presenting a webinar entitled “Available Remedies in Trade Secret and Restrictive Covenant Cases” for LawPracticeCLE at 2 p.m. Eastern. It will also be available on demand.

Course Description

When a current or former employee or business partner misappropriates trade secrets or breaches a restrictive covenant agreement, such as a noncompetition, non-solicitation, or nondisclosure agreement, the aggrieved party may often, depending on the jurisdiction, pursue injunctive relief and damages against the employee or business partner. Quantifying the damages to the business resulting from the breach of covenant can be challenging. The Defend Trade Secrets Act of 2016 provides additional avenues for seeking injunctive relief and damages for trade secret theft, as do individual state laws. Courts may double damages and award attorneys’ fees in the event of willful and malicious appropriation of trade secrets. Employers can also sometimes pursue damages from a former employee’s new employer for interference with the departing employee’s restrictive covenants. Companies face additional challenges when attempting to enforce restrictive covenants when some or all of the actionable conduct takes place outside the U.S. Listen as our authoritative panel discusses strategies and best practices for employers to pursue injunctive relief and damages against a current or former employee and/or his new employer following a trade-secret misappropriation, or a breach of a covenant not to compete, solicit, or disclose confidential information. Our panel will offer drafting strategies to give companies the most robust platform for enforcing their contractual and fiduciary rights.

 

Register for the webinar at the LawPracticeCLE website at https://lawpracticecle.com/courses/available-remedies-in-trade-secret-and-restrictive-covenant-cases/

On Friday, July 9, 2021, the Biden Administration released its executive order on “Promoting Competition in the American Economy.” We previously wrote about the forthcoming order and predicted that the executive order’s treatment of non-compete provisions would be a general call to rulemaking versus a more authoritative or immediate directive to the FTC. Continue Reading President Biden Issues Executive Order Encouraging the FTC to Consider Curtailing the Use of “Unfair” Non-Competes, but Without Providing any Additional Guidance or Details

The Biden Administration plans to issue an executive order calling on the Federal Trade Commission (FTC) to adopt rules to limit the use of noncompete clauses in employment agreements. According to Axios, White House Press Secretary Jen Psaki told reporters that “roughly half of private sector businesses require at least some employees to enter noncompete agreements, affecting over 30 million people. This affects construction workers, hotel workers, many blue-collar jobs, not just high-level executives. [President Biden] believes that if someone offers you a better job, you should be able to take it. It makes sense.” Indeed, in 2016, then Vice President Biden went on the record that “no one should have to sit on the sidelines because of an unnecessary non-compete agreement.” While the intervening years have not seen any federal action on non-competes, a number of states have enacted legislative changes to narrow the scope and availability of noncompete agreements. Continue Reading Biden to Ban Non-Competes?

As changes in restrictive covenants laws sweep the nation, Nevada is one of the latest jurisdictions to update its non-compete statute. Last month, the state legislature amended the Nevada Unfair Trade Practices Act to add new requirements for enforceability of non-competes.

The amendment makes the following changes in Nevada law: Continue Reading Nevada Amends Non-Compete Statute Protecting Low-Wage Workers and Imposing Award of Attorneys’ Fees for Certain Violations

The Sedona Conference’s working group on trade secrets has created a draft Commentary on Protecting Trade Secrets throughout the Employment Life Cycle. The draft Commentary explains:

Employees are at the center of most aspects of trade secrets: Trade secrets cannot exist without the work of employees, cannot be protected without the efforts of employees, and would rarely be compromised or lost without the conduct of employees. This Commentary on Protecting Trade Secrets throughout the Employment Life Cycle focuses on the inherent potential tensions this creates in the employer-employee relationship.

While in most circumstances, employers and employees will be aligned in protecting trade secrets for their mutual benefit at the beginning and during the employment relationship, at the end of the relationship, there is an inherent tension between an employer’s interest in protecting its trade secrets and an employee’s interest in engaging in future employment. This tension is further complicated by the fact that, although the departing employee is at the end of one employment life cycle, they are typically simultaneously at the beginning of the next, where the former employer’s risk of loss of its trade secrets corresponds directly to the new employer’s risk of infiltration of those same trade secrets.

This Commentary addresses these issues through a chronological view of the employment relationship, from the recruiting and on-boarding, to the period of employment, to the off-boarding, and back to the on-boarding.

If you are interested in this important issue, you can download the Commentary here. Comments can be submitted through September 30, 2021, to comments@sedonaconference.org.

Robert Milligan serves as a member of the Sedona Conference Working Group 12 Trade Secrets Advisory Working Committee, co-leads the Employee Life Cycle subgroup, and is a Senior Editor for the Commentary on Protecting Trade Secrets throughout the Employment Life Cycle.

In the fourth installment of our 2021 Trade Secrets Webinar Series, Seyfarth attorneys Jesse Coleman, Matt Simmons, and Kevin Green outlined recent legal developments in Texas trade secret and non-compete law and how it is similar to and diverse from other jurisdictions. The webinar also covered how these latest developments impact counseling, litigation, and deals involving companies with employees based in Texas.

As a conclusion to this webinar, we compiled a summary of takeaways:

  • A restrictive covenant is a legal term for a clause in an employment contract (or a standalone agreement) that prevents an employee from doing something. Most often, restrictive covenants are designed to prevent a departing employee from competing with his/her former employer for clients or business.
  • There are four types of restrictive covenants: 1) non-competition; 2) non-solicitation of customers; 3) non-solicitation of employees; and 4) non-disclosure. Common limitations relate to time, geographic or customer restrictions, and the departing employee’s scope of activity in their new employment.
  • Trade secret can be elusive to define, but generally consists of: 1) identifiable information 2) not generally known to others (i.e. secret) 3) that is economically valuable and 4) subject to reasonable efforts to maintain secrecy. Famous example is Coca-Cola recipe, but trade secrets are not limited to products alone and can also be processes, confidential information such as business plans, and other know how.
  • In over 90% of trade secret cases, the misappropriator is someone the trade secret owner knew (former employee or business partner). Vast majority of cases involve misappropriation by electronic means.
  • Texas believes in the freedom to contract with certain statutory safeguards on the reasonableness of the restrictive covenant (non-compete, non-solicitation) as it relates to time, geographical area, and scope of activity restrained.
  • Unlike other States, Texas does not have a minimum salary for the restrictive covenant to be enforceable or differentiate enforceability of the covenant based on whether the employee was terminated or resigned.
  • Generally, Texas employee and customer non-solicitation covenants are adjudged based on the same reasonableness requirements as non-competes pursuant to Tex. Bus. & Com. Code Section 15.50(a).
  • Generally, reformation of a restrictive covenant is required under Texas law; however, the timing of the reformation (during the initial stages of litigation or upon a final trial on the merits) is still an open question.
  • In order to later revise restrictive covenant agreements, employer must provide additional consideration in Texas and it is highly recommended that such consideration is provided close in time to the employee’s execution of the new agreement.
  • Texas enacted its own trade secret statute – the Texas Uniform Trade Secrets Act- in 2013, modeled on the Uniform Trade Secrets Act (UTSA), and amended in 2017 to align more closely to the federal Defend Trade Secrets Act (DTSA) and controlling case law.
  • Minor differences exist in the definition of “trade secret” between TUTSA and DTSA, TUTSA lacks whistleblower immunity provisions and a specific mechanism for ex parte seizures, and TUTSA preempts related common law claims while the DTSA does not.
  • TUTSA provides greater scope of injunctive relief to employers in cases of trade secret theft than DTSA but will not enjoin a departing employee from using general knowledge, skill, and experience acquired during the employment relationship.
  • Texas appellate courts vary in applying the inevitable disclosure doctrine when granting injunctive relief under TUTSA, while the Texas Supreme Court recognizes that a competitive decision maker may not be able to resist acting on what they learn of a competitor’s trade secrets, even when acting in good faith.
  • TUTSA provides similar monetary relief to both DTSA and UTSA, including actual losses, unjust enrichment, reasonable royalties, exemplary damages, and attorneys’ fees, under specific circumstances.

In the third installment of our 2021 Trade Secrets Webinar Series, Seyfarth attorneys Dan Hart, Kevin Young, and Cary Burke outlined the connection between wage and hour law and restrictive covenant law. We addressed how these important and impactful areas of employment law intersect and can, if not managed appropriately, create layered and compounding risks for employers. We also addressed practical tips for managing those risks, such as conducting proactive audits and considering arbitration clauses.

As a conclusion to this webinar, we compiled a summary of takeaways:

  • Wage and hour lawsuits continue to be one of most common types of employment lawsuits that employers face.
  • Meanwhile, with data being more important, and more accessible to employees, than ever before, restrictive covenants remain one of the most important tools in an employer’s toolkit.
  • Even if not obvious, these two forces—wage and hour lawsuits on the one hand and restrictive covenants on the other—can converge and feed one another. Many states, for example, expressly or implicitly look to statutory overtime exemptions to define which types of workers may be bound by a non-compete promise. Other states limit non-compete covenants to employees who earn compensation above a certain level or perform duties that are typically associated with exempt employees.
  • Given the potential for a restrictive covenant action to feed an exempt misclassification claim, or vice versa, it is important for employers to take proactive steps to ensure proper classification of employees. In addition, multi-state employers relying on restrictive covenant agreements are well-served to periodically assess their standard restrictive covenant agreements to ensure consistency with state-specific laws, including laws restricting the types of employees who may be bound by such an agreement.

Because of the ever-evolving nature of restrictive covenants and wage and hour law, it is more important than ever for employers to stay abreast of the latest legal developments to ensure that the company’s template restrictive covenant agreements are compliant with applicable laws and meet business needs without posing unintended risks. If your company has not recently reviewed and revised its template restrictive covenant agreements, please contact a member of Seyfarth’s Trade Secrets, Computer Fraud & Non-Competes practice group for help.

LM-2020

Next Thursday, June 24, at 12:00 a.m. Eastern/9:00 a.m. Pacific, Seyfarth partner Dawn Mertineit will present a live webcast discussing Lex Machina’s Trade Secret Litigation Report for 2021. Dawn will join Morgan Lewis’s Seth Gerber and one of Lex Machina’s legal content associates and co-author of the report, Gloria Huang, to discuss the key trends in the report, including the number of trade secrets case filings, average timing for various stages of litigation, most active law firms and parties, and more. And stay tuned for a follow-up blog discussing the report’s key findings.

More details and a registration link can be found here.

With unemployment levels reaching a new high during the global pandemic, courts across the country have become increasingly reluctant to enforce non-compete agreements in employment contracts. As an example, a recent district court case, Robert Garcia v. USA Industries, Inc., demonstrates what may be a shift in Texas’ formerly lenient approach to non-competes. There, the court granted the plaintiff’s request for a temporary restraining order against the non-compete clause in his severance agreement, finding not only that there was inadequate consideration to enforce the non-compete provision, but that the provision itself was unreasonable. While this is only one case, in light of this shift in the interpretation of non-compete agreements as reflected in this decision, companies should ensure that their non-competes are reasonable as to scope and time, supported by adequate consideration, and narrowly tailored to protect the company’s legitimate business interests so as to increase the chances of the agreement being upheld. This will only become more important as more and more states pass restrictive covenants legislation limiting what is permissible. Continue Reading Texas Decision Highlights Concerns Regarding Limiting Enforceability of Non-Compete Agreements During COVID-19 Pandemic