Continuing our annual tradition, we have compiled our top developments and headlines for 2019 & 2020 in trade secret, non-compete, and computer fraud law. Here’s what you need to know to keep abreast of the ever-changing law in this area.
1. Another Year, Another Attempt in Congress to Ban Non-Competes Nationwide
Senators Chris Murphy (D-Conn.) and Todd Young (R-Ind.) introduced legislation in 2019 entitled the Workforce Mobility Act (“WMA”). The WMA seeks to ban non-compete agreements outside of the sale of a business or dissolution of a partnership.
Not only would the WMA abolish covenants not to compete nationwide, outside of the extremely narrow exceptions highlighted above, but it would also provide the Department of Labor (DOL) and Federal Trade Commission (FTC) with broad enforcement power. If enacted, the legislation would empower the FTC and DOL to enforce the ban through fines on employers who either fail to notify employees that non-compete agreements are illegal or who require employees to sign covenants not to compete. Additionally, the WMA establishes a private right of action for all employees allegedly aggrieved by a violation of the WMA.
The WMA contains a carve out for parties to enter into an agreement to protect trade secrets. As currently drafted, the WMA does not abrogate the scope of protections provided by the Defend Trade Secrets Act.
Presently, there are no generally applicable federal restrictions on non-compete agreements, and enacting such a law would have to pass Constitutional muster. We expect to see continued activity at the federal legislative level to attempt to ban or limit the use of non-competes.
2. New State Legislation Regarding Restrictive Covenants
On May 14, 2019, Oregon Governor Kate Brown signed into law HB 2992, which, as of January 1, 2020, requires an employer to provide a terminated employee with a signed, written copy of his or her non-competition agreement within 30 days of his or her termination date. Failure to do so will render the agreement voidable and unenforceable in the state of Oregon.
Washington state’s new House Bill 1450, went into effect on January 1, 2020. The new law eliminates non-compete agreements for employees earning less than $100,000 a year and independent contractors earning less than $250,000 a year. The law requires advance notice of non-competes “no later than the time of acceptance of the offer of employment” and “independent consideration” for non-competes entered into after employment. The new law also provides additional changes regarding reasonable covenant durations, disclosure requirements, enforcement limitations, remedies, and venue and choice of law restrictions. Although the new statute did not go into effect until January 1, 2020, the statutory language suggests that agreements entered into prior to the effective date of the statute could, nevertheless, become void and unenforceable by retroactive application of the statute.
S.1117 (“An Act relative to clarifying legislative intent regarding the non-competition law”) was introduced in 2019 in the Massachusetts Senate. As currently drafted, Massachusetts’ 2018 non-compete law prohibits the enforcement of non-competes against employees “terminated without cause.” However, that law contains several loopholes, including that it does not define the term “without cause,” leaving it open to wide interpretation. S.1117 proposes to amend the 2018 law “by adding, after the words ‘terminated without cause’, the following:- ‘as defined by the parties in the noncompete agreement’.” Presumably then, an employer can include a specific definition of “cause” in the non-compete agreement, or even simply refer to the common law definition. It is unclear, however, whether a court would revert to the common law if an agreement is silent in that regard, or interpret any silence as meaning that a termination, regardless of the factual circumstances surrounding it, is without cause, and thereby deem the agreement unenforceable. There are certainly some judges in the Commonwealth who are hostile to non-compete agreements and would take the latter approach, so careful drafting will be necessary if S.1117 becomes law.
Unrelated to its 2018 non-compete law, the Massachusetts legislature has also been considering two companion bills (H.1686 and S.1050) that would exempt physician assistants from non-compete laws. If passed, this would add physician assistants to the list of professions already exempted from non-competes in Massachusetts, which currently includes physicians, nurses, psychologists, social workers, employees in the broadcast industry, and, of course, lawyers.
LD 733, An Act To Promote Keeping Workers in Maine, took effect in Maine on September 18, 2019. Maine joined its neighbors, New Hampshire and Massachusetts, along with Maryland, Illinois and Washington, all of which have passed legislation limiting restraints placed on lower wage employees. LD 733 places limits on non-compete agreements on low-wage employees earning wages at or below 400% of the federal poverty law and bans restrictive employment agreements. For employees who earn more than 400% of the federal poverty level, non-competes are disfavored and only enforceable if necessary to protect the legitimate business interest of the employer, which includes trade secrets, non-trade secret confidential information and goodwill. Where an offer of employment is contingent upon execution of a non-compete agreement, a prospective employee must be given at least three days’ notice before being required to sign the agreement. This notice period is designed to allow for time to review the agreement and negotiate the terms of their employment. Aside from a limited exception for certain types of physicians, a non-compete agreement will not take effect until one year from the date of employment or six months from the date of execution, whichever is later. If an employer is found to have violated either the low-wage employee or notice provisions, they will be deemed to have committed a “civil violation for which a fine of not less than $5,000 may be adjudged.”
On July 11, 2019, New Hampshire Governor Chris Sununu signed S.B. 197 into law. S.B. 197 prohibits an employer from requiring an employee who makes 200% of the federal minimum wage ($14.50) to sign a non-compete agreement restricting the employee from working for another employer for a specified period of time or within a specific geographic area. Any “noncompete agreement entered into between an employer and a low-wage employee shall be void and unenforceable.” The new law took effect in September 2019 and had bipartisan sponsorship.
Following in the footsteps of its neighbors Maine, Massachusetts, and New Hampshire, Rhode Island recently enacted legislation that restricts the use of non-competition agreements with certain types of employees. The Rhode Island Noncompetition Agreement Act, which became effective on January 15, 2020, prohibits non-competes without regard to geographic location and duration for the following types of employees: (1) non-exempt employees under the FLSA; (2) undergraduate or graduate students participating in an internship or short-term employment; (3) employees aged 18 or younger; and (4) low-wage workers (defined as earning 250% or less of the federal poverty level ($31,225 per year under current data). The Act also makes clear that it excludes the following agreements: (1) non-solicitation agreements concerning customers, vendors, and employees; (2) forfeiture agreements (except for forfeiture for competition agreements); (3) non-disclosure, confidentiality, and invention assignment agreements; (4) non-competes made in connection with a sale of a business where the employee is a significant owner, member, or partner in the entity sold and is receiving significant consideration or benefit as a result of the sale of the business; (5) non-competes originating outside of the employment relationship (such as independent contractors); (6) non-competes made in connection with the separation from employment if the employee is expressly granted seven business days to rescind acceptance; and (7) non-competes under which the employee agrees not to reapply for employment with the employer after termination.
Maryland’s Noncompete and Conflict of Interest Clauses Act took effect on October 1, 2019. The new law recognizes that certain non-compete and conflict-of-interest clauses violate Maryland’s public policy and are therefore null and void. The new law prohibits employers from mandating that certain employees not join another employer or become self-employed in a same or similar business area. The covered employees are those who earn equal to or less than $15 per hour or $31,200 annually. This prohibition applies even if the parties entered into the employment agreement outside of Maryland and is not restricted to only post-employment actions. That is, a qualified employee may work for a competitor even during the term of employment.
For more information and for a review of the latest changes to state laws, please check out Seyfarth Shaw’s 2019-2020 edition of its 50 State Desktop Reference.
As always, we will continue to monitor state and federal legislation governing restrictive covenant agreements. We expect to see additional efforts to ban or limit non-competes at the state level.
3. State Attorney Generals Increase Scrutiny of Restrictive Covenants
A group of 18 attorneys general filed comments with the Federal Trade Commission (“FTC”) in July 2019 in advance of a series of hearings centered on changes to antitrust and consumer protection enforcement in the 21st century. The letter identifies four major areas where recent antitrust activity involving labor issues have occurred: (1) horizontal no-poach agreements between employers; (2) vertical no-poach agreements, particularly franchise agreements; (3) non-compete agreements between employers and employees; and (4) mergers impacting labor markets.
Many of those same attorneys general sent another letter to the FTC in November 2019, urging it to use its rulemaking authority “to bring an end to the abusive use of non-compete clauses in employment contracts.” The efforts by these attorneys general appear to be a reflection of their enforcement priorities, rather than a genuine expectation that the FTC will actually grant their requests. The letters also highlight the alleged use and enforcement of non-competes against low wage employees. While there may be isolated incidents of employers seeking to enforce non-competes against janitors, home health aides, sandwich makers, and the like, in our experience employers more often seek to enforce such agreements against senior level executives with knowledge of the employer’s valuable trade secrets or customer-facing salespeople that may use confidential information to take customers to their new employer.
4. Federal Government Agencies Increase Scrutiny of Restrictive Covenants
Within the last six months, the US Department of Justice (“DOJ”) and FTC have held public workshops to examine the effect of non-compete clauses in employment contracts on the labor market. The DOJ held its workshop on September 23, 2019, while the FTC recently held its own on January 9, 2020. The purpose of the FTC workshop was “to examine whether there is a sufficient legal basis and empirical economic support to promulgate a Commission Rule that would restrict the use of non-compete clauses in employer-employee employment contracts.”
Why the FTC now wants to regulate in the employment space concerning employee non-competes is not readily apparent apart from attempting to capitalize on a low-hanging fruit populist issue concerning the over reporting of some companies allegedly using and enforcing non-competes with low-wage workers. Needless to say, scrutiny of non-compete provisions will remain an FTC priority this year, especially in the wake of changes to state labor laws to protect low-wage workers. It is not clear why the business community would support any blanket ban on non-competes.
Unsurprisingly, then, after a general and historical presentation on these clauses and the regulatory landscape, the FTC’s workshop opened up with economic scholarship reflecting how non-competes allegedly chilled labor mobility, stifled wage growth, worsened income parity and business dynamism, caused anticompetitive harm, and increased the chances of a monopsony.
While there was broad consensus that the FTC has statutory authority under the Sherman and FTC Acts to regulate non-competes, questions still remained: are there enough empirical data and legal precedents to justify FTC rulemaking; and if so, what should be done? The answers ran the gamut. While recent scholarship offers opposition to noncompetes, comprehensive reviews are novel and appear too limited to justify action. Assuming there is evidence to convince the FTC to act, the ideas offered included (a) banning non-competes altogether for low-wage workers, (b) creating a rebuttable presumption in court that non-competes are illegal, (c) limiting non-competes to those with access to a company’s trade secrets, (d) minimizing the duration and geographical scope of such provisions, (e) requiring garden leave as consideration for the enforcement of these agreements, (f) voiding non-competes unless the employer has disseminated notice of the covenants at appropriate times, and (g) banning intra-franchise non-poach agreements. Even still, one continues to wonder about the practical effects of any regulation.
Below are links to the videos of the morning and afternoon sessions of the FTC workshop:
On February 11, 2020, the FTC announced that it has issued Special Orders to five large technology firms, requiring them to provide information about prior acquisitions not reported to antitrust agencies under the Hart-Scott-Rodino Act. The FTC explained that the Special Orders will help it deepen its understanding of these acquisition activities and whether large tech companies are making potentially anticompetitive acquisitions. The orders also require companies to provide information and documents on their corporate acquisition strategies, voting and board appointment agreements, agreements to hire key personnel from other companies, and post-employment covenants not to compete. Last, the orders ask for information related to post-acquisition product development and pricing, including whether and how acquired assets were integrated and how acquired data has been treated.
The FTC has invited public comments regarding if it should use its rulemaking authority to regulate non-competes in employment agreements and the appropriate scope and terms of any such rule. The FTC has extended the deadline to submit public comments to March 11, 2020.
5. Supreme Court Issues Decision Significantly Expanding the Scope of FOIA’s Confidentiality Exemption
On June 24, 2019, the United States Supreme Court issued its decision in Food Marketing Institute v. Argus Leader Media. The Court’s decision resolves fractured circuit splits about the parameters for when the government may withhold information from a Freedom of Information Act (“FOIA”) request based on responsive information being confidential or a trade secret. Importantly, the Court did away with the former requirement that a company requesting confidential treatment of its information demonstrate it would suffer “substantial competitive harm,” which, in practice, could be quite costly to prove up and, as a practical matter, required the company to prove harm based on the occurrence of a hypothetical event. Now, an entity seeking shelter under FOIA’s confidentiality exemption, Exemption 4, need only show that (1) the commercial or financial information is customarily and actually treated as private by its owner; and (2) that the information was provided to the government under an assurance of privacy. The decision creates a far more accommodating framework for entities seeking to protect information as confidential under FOIA Exemption 4.
The Court’s decision has significant ramifications for industries that provide important, valuable data to the government, particularly where the confidential information is subject to a mandatory reporting or disclosure obligation. The decision also generally supports the proposition that companies can maintain property rights in their confidential information through written agreements (such as those used with employees and third parties) and that courts should give effect to those agreements. As a result of this decision, government contractors will likely be able to protect more information that is disclosed to the government. In contrast, government contractors that regularly seek such information through FOIA requests may receive much less information in response.
Prior to disclosing confidential information, entities faced with a government request to disclose information should clearly identify and label confidential information as confidential and also seek to obtain written assurances from the government that such information will be treated as such. Entities should also review their internal policies and procedures to proactively identify materials that warrant confidential treatment and to establish procedures for how such materials should be handled when distributed to the government or other third parties. Of course, once implemented, all such policies should be vigilantly enforced so that such policies are not used as evidence of a company’s non-compliance with its own procedures.
6. Potential Trade Secret Claims Post-Texas TCPA Amendments
Effective on September 1, 2019, the 86th Texas Legislature’s amendments to the Texas Citizen’s Participation Act, Texas Civil Practices and Remedies Code Chapter 27 (“TCPA”) essentially removed the vast majority of trade secret claims from the TCPA’s grasp. These amendments intentionally sought to eliminate the application of the TCPA to certain run-of-the-mill trade secret cases with fact patterns arising from independent contractor relationships and departing employees. Nevertheless, the TCPA may apply in light of past precedent to other, less common claims and fact patterns, such as: claims for declaratory relief, formularized mutual information exchanges, idea theft by a potential employee or business partner, corporate espionage, and computer hacking.
As demonstrated by the commonality of facts between the pre-amendment cases both applying and rejecting the TCPA, no one set of facts will definitively allow for a trade secret claim to fall within the target zone of the TCPA. After all, the amendments were specifically designed to reduce the number of trade secret lawsuits to which the TCPA applied, thus allowing such cases to proceed through litigation.
That said, businesses faced with potential trade secret claims that fall outside of the traditional “departing employee” construct would do well to consider that a slim window exists under which they may still be “slapped” by the TCPA.
7. Notable, Criminal Trade Secret Cases
The US government has recently reported that the FBI is investigating over 1,000 cases of Chinese theft of US technology. Specific, notable criminal trade secrets from last year include: a Chinese national and US legal permanent resident pleading guilty to theft of trade secrets valued at over $1B from a US-based petroleum company; Russian and Italian nationals being charged with conspiring to steal trade secrets from an American aviation company; a former GE engineer being charged with theft of trade secrets surrounding turbine technologies, and a former Monsanto employee being indicted on charges to steal trade secrets regarding digital, online farming software platform and its proprietary predictive algorithm.
8. Notable Trade Secret Civil Cases
On the civil side, the Alleghany Court of Common Pleas in Pittsburgh, Pennsylvania, denied a law firm’s request to enjoin its former partner from retaining a database that contained various information used to file legal actions under the American with Disabilities Act (See Carlson Lynch Sweet Kailpela & Carpenter, LLP v. Sweet, GD-19-2790). According to the law firm, the database was a “trade secret” of the firm, and consequently, the former partner violated the Pennsylvania Trade Secrets Act when he retained a copy of the database after being voted out of the firm in January. The court, however, disagreed with the law firm. In doing so, the court noted that the former partner had an ownership interest in the database when he was part of the firm, and as a result, the former partner could retain a copy of the database when he left. The court then went on to note that, since the data base now resided at two different law firms, the database could not be considered a trade secret under the Pennsylvania Trade Secrets Act. This case is a reminder to all law firms, as well as companies in general, to be cognizant of what owners can and cannot take when they leave their firm.
A California Court of Appeals held in MGA Entertainment, Inc. v. Mattel, Inc., Case No. B289709 (Oct. 29, 2019) that the statute of limitations had run on the plaintiff’s trade secret claims and affirmed dismissal of the lawsuit. The question on appeal was whether the plaintiff’s misappropriation of trade secrets claim was timely filed on August 16, 2010, when the plaintiff first asserted its counterclaim in a prior action involving the same defendant. The defendant argued that the plaintiff’s claim was not timely because it was filed more than three years after the plaintiff first asserted its unclean hands defense in the prior action and, thus, the plaintiff had been on notice of the potential claim for more than three years. This recent decision reinforces that companies must take proactive measures once they have some knowledge that a competitor or former employee is misusing their trade secrets. A company cannot wait until it has definitive evidence of such misappropriation. Instead, once the company is on notice that some misappropriation has occurred, the company must take the action necessary to preserve its rights.
A Louisiana federal district court in Cajun Services Unlimited, LLC v. Benton Energy Serv. Co., CV 17-0491, 2019 WL 2410933 (E.D. La. June 7, 2019) held that information included in a patent application remains an actionable trade secret, thereby extending the time for potential misappropriation until the patent’s publication. This decision illustrates the complementary but distinct nature of legal rights regarding patents and trade secrets.
9. Restrictive Covenant and Forum Selection Clause Case Law Continues to Vary State to State
The Supreme Court of Kentucky ruled in Greissman v. Rawlings and Associates, PLLC that firms may require lawyers to sign non-solicitation agreements that exempt legal work.
The Colorado Court of Appeals decided an issue of first impression in 23 LTD v. Herman regarding whether the court was required to blue pencil (modify) the non-solicitation covenant. The court refused to enforce a non-solicitation covenant on grounds that it violated public policy.
The Delaware Chancery Court in Nuvasive, Inc. v. Miles refused to apply Delaware law to a case involving a California medical device maker. While the non-compete provision at issue called for interpreting judges to follow Delaware law, the court declined to do so, saying California’s strong opposition to non-competes trumped the device maker’s bid to use Delaware law. Notably, the court had issued an earlier decision in the same case acknowledging that California Labor Code § 925(e) allows the use of non-California choice of law and forum provisions in employment agreements with California residents who are represented by counsel in negotiating the agreement. Under those circumstances, California’s interest in freedom of contract outweighs its interest in freedom of employment. The defendant later filed a renewed motion for summary judgment and pointed to evidence of record that he had not, in fact, been represented by counsel during negotiation of the agreement and, thus, the statutory exception under Section 925(e) had not been implicated.
In contrast, the Delaware federal district court in W.R. Berkley Corp. v. Niemela found Delaware law, not California law, applied to anti-recruitment covenant even though the employee resided, signed the covenant, and planned to compete in California, and the court cast doubt on the reasoning in the Nuvasive, Inc. v. Miles decision in light of previous appellate authority.
The Massachusetts court in NuVasive, Inc. v. Day confirmed that Massachusetts’ new non-compete law does not require garden leave or Massachusetts choice of law.
10. First UK Supreme Court Decision on Restrictive Covenants for 100 years
In 2019, we saw the Supreme Court in the UK, the highest court in the country, rule on a restrictive covenant case for the first time in 100 years [Tillman v Egon Zehnder Ltd  UKSC 32 (3 July 2019)]. It had long been established in the UK, that restrictive covenants are an unlawful restraint of trade unless they go no further than is necessary to protect the employer’s legitimate proprietary interests. It had also been an accepted principle that a UK court will not rewrite an employer’s covenant. This means that a UK court would not reduce the length or geographical scope of a restriction to make it reasonable or fix defective drafting. The principle is that employers should not be able to draft clauses widely as a deterrent, knowing the courts would then write them down to still be enforceable.
The UK Supreme Court effectively overturned 100 years of court precedent, removing the need to consider whether blue -penciling (i.e., severance of offending terms to make the covenant enforceable) was being applied to a standalone covenant. In the Supreme Court’s opinion, the relevant question was whether removal of the offending provision could be achieved without a major change in the overall effect of all the post-employment restraints.
This decision is without doubt a good result for employers, who can now argue that certain provisions in a covenant which are too broad or are irrelevant can be deleted, to “save” a covenant that would otherwise be unenforceable. However, the decision does not serve as a carte blanche for employers to start drafting overly wide covenants, safe in the knowledge that the Courts will save the underlying covenant. The best advice still remains that it will always be preferable for employers to spend the time getting covenants right in the first place, rather than go through the time, expense and uncertain outcome of court proceedings to try and rectify.
Trade secret, misappropriation, computer fraud, and restrictive covenant law is filled with nuances that require counsel to keep on top of changes and developments. For further resources on the varying trade secret and state non-compete laws, refer to the “50 State Desktop Reference: What Businesses Need To Know About Non-Compete and Trade Secrets Laws,” our award winning blog, and our periodic webinar series.