Throughout 2022, our dedicated Trade Secrets, Computer Fraud & Non-Compete practice group hosted a series of CLE webinars that addressed significant trade secret and restrictive covenant issues facing companies today. This year’s series included:
- 2021 Trade Secrets & Non-Competes Year in Review
- Protecting Trade Secrets and Enforcing Restrictive Covenants Internationally
- Employee Mobility & Its Effects on Trade Secrets and Non-Competes
- Anatomy of a Restrictive Covenant
- How and Why Texas Is Different When It Comes to Trade Secrets and Non-Competes
- How Multijurisdictional Businesses Should Approach Non-Competes
- Protecting Confidential Information and Client Relationships in the Financial Services Industry
- Overview of Non-Compete Legislation and Enforcement Issues from 2022
As a conclusion to our 2022 webinar series, we compiled a list of key takeaway points for each program. For those who missed any of the programs in this year’s series, recordings of all of our past webinars are available on the blog, or you may click on the link for each webinar below to view the recording.
2021 Trade Secrets & Non-Competes Year in Review
The first webinar in the series, led by Robert Milligan, Michael Wexler, and James Yu, reviewed noteworthy legislation, cases, and other legal developments from across the nation throughout 2021 in the areas of trade secrets and data theft, non-competes and other restrictive covenants, and computer fraud. Plus they provided predictions for what to watch out for in 2022.
- Recent trade secret decisions demonstrate the need for the plaintiff to clearly articulate the alleged trade secret misappropriated in its complaint by describing its trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade and to permit the defendant to ascertain at least the boundaries within which the secret lies. Additionally, a recent Third Circuit decision held that copying is not the only method that trade secret plaintiffs can demonstrate actionable “use” under the Defend Trade Secrets Act. The court held that the use of a trade secret encompasses all the ways one can take advantage of trade secret information to obtain an economic benefit, competitive advantage, or other commercial value, or to accomplish a similar exploitative purpose, such as assisting or accelerating research or development. The Third Circuit also held that plaintiff sufficiently alleged misappropriation based on circumstantial evidence. The court reasoned that indirect use can be inferred from the timing of a defendant employee’s hire, deception in the employee’s departure, the corporate defendant’s lack of experience in the industry, low financial investment, and quick success.
- At the federal level, we continue to see bipartisan attempts to address a national uniform approach to non-compete covenants. While the present bills are not likely to pass, it is apparent from Biden’s July 9, 2021, Executive Order that federal agencies, including the FTC, DOJ, and DOL, are being delegated and empowered with enforcement responsibilities aimed at curtailing the use of non-compete agreements that are perceived to limit workforce mobility. In particular, in December 2021, the DOJ and FTC hosted a virtual workshop that brought together policy experts and labor leaders to discuss efforts to promote competitive labor markets and worker mobility, including scrutinizing and limiting the use of restrictive covenants. Furthermore, the DOJ also obtained criminal indictments against employers in the health care and aerospace engineering industries who have allegedly violated antitrust laws by conspiring to refrain from soliciting or hiring each others’ workers. This has spilled over into civil class action lawsuits brought by employees alleging that the conspiracy impacted their wages and careers or that they have been otherwise harmed by these so-called no-poach agreements. Given the Biden Administration’s objective of fostering worker mobility, 2022 will likely see additional efforts at the federal level to curb the use of non-compete and no-hire agreements, particularly with respect to lower waged workers.
- Care should be taken to review state law as to new statutes affecting employee non-compete/non-solicit provisions and applicability with at least 20 states having new statutes and approximately 70 statutes pending.
- Particular attention should be paid to timing for notifying employees of covenant provisions and providing agreements for review.
- Employee compensation thresholds must be carefully examined to determine if covenants are prohibited under state law for lower earning employees.
Protecting Trade Secrets and Enforcing Restrictive Covenants Internationally
In the second webinar of the 2022 series, Seyfarth partners Jesse Coleman, Dan Hart, and Caitlin Lane discussed how to identify the greatest threats to trade secrets, provided tips and best practices for protecting trade secrets abroad, and covered enforcement mechanisms and remedies internationally and in the US.
- US Law provides two key statutes with civil remedies for protecting trade secrets where the misappropriation occurs extraterritorially—ITC Section 337 (19 U.S.C. § 1337) and the Defend Trade Secrets Act, 18 U.S.C. § 1837—each with different remedies, requirements of applicability, and pros/cons.
- Employers should ensure that their employment agreements include favorable choice-of-law, venue, and forum-selection clauses to increase the likelihood that any subsequent legal proceeding for trade secret misappropriation occurs in a location that is likely to recognize and protect the company’s intellectual property.
- Employers should form a well-rounded, strategic approach to global defense of trade secrets and leverage multiple protective mechanisms including restrictive covenants, notice periods, contractual agreements and statutory protections.
- Restrictive covenants should be tailored for jurisdictional requirements and nuances—one-size does not fit all when it comes to protecting trade secrets across multiple countries.
- Employers should implement a holistic strategy for protecting trade secrets at every stage of the employment relationship, from onboarding to pre-litigation enforcement efforts post-termination, with coordination between HR, Legal, IT, and other stakeholders within the company.
- Practical measures should also be taken to protect confidential information and trade secrets, including limiting access to sensitive information, using exit interviews, and (provided that applicable privacy laws are followed) monitoring use of company IT resources and conducting forensic investigations of departing employees’ computer devices.
Employee Mobility & Its Effects on Trade Secrets and Non-Competes
In the third webinar in the 2022 series, Seyfarth attorney Justin Beyer discussed employee mobility and its impact on trade secrets and non-compete agreements and shared practical steps that companies can take to protect intellectual capital in today’s market.
- Protecting trade secrets when dealing with a more remote workforce requires employers to develop policies and practices throughout the lifecycle of onboarding, employment, and off-boarding. It is not enough to simply assume that the new hire will know and abide by his or her obligations, and requires a proactive approach, which may require the company to consider its hiring paperwork (are your current contracts sufficient to protect your interests?), its training procedures, and its off-boarding policies.
- Employers should consider developing policies that include: (a) asking questions during the onboarding process to best understand what obligations and role the candidate played in their prior employment and whether employing them will place your organization at risk; (b) developing regular training for employees to understand what the company considers its confidential information and what should be done to protect that information, as well as providing guidance to managers on understanding how to monitor their employees to ensure they are protecting the company’s confidential information; and (c) developing off-boarding policies to remind outgoing employees of their obligations and ensuring that information is being returned in an orderly fashion.
- Because of the ever evolving law on this area, especially as it relates to a host of new state statutes that have been passed over the past several years relating to the enforceability of post-employment restrictive covenants, it is important for your company to frequently assess the employment contracts it is utilizing, especially if members of its remote workforce live and work in some of the states that are passing new legislation.
Anatomy of a Restrictive Covenant
In the fourth installment of the 2022 webinar series, Seyfarth attorneys Kate Perrelli, Matt Simmons, and Robyn Marsh discussed restrictive covenant agreements (“RCAs”), including non-competes, non-solicitations, and NDAs. Plus they discussed best practices and practical tips companies can implement regarding restrictive covenant agreements.
- All or some combination of post-employment RCAs (nondisclosure, non-compete, non-solicit of employees and customers) can be an effective tools in protecting an employer’s legitimate business interests: confidential information, trade secrets, and customer goodwill.
- Enforcement of these provisions are typically driven by state laws, and in the non-compete context are constantly changing and employers need to stay up to date on these changes. Federal law may some day impact non-competes as well.
- To maximize enforcement of these provisions, be sure to tailor them narrowly so that they are aimed at protecting legitimate business and are not over broad.
- Employers should be sure to supplement these tools with training of workforce on importance of protecting confidential information and trade secrets, and make sure your own house is in order with secure systems, password protected access to confidential information and trade secrets, and strict onboarding and off boarding of employees around these issues.
- When reviewing your current RCA for enforceability and/or whether your company may need to update it, focus on applicable State(s) law and whether your RCA satisfies the basic limitation requirements of (a) consideration, (b) time, (c) scope of activity, and (d) geography.
- In determining the reasonableness of your current RCA, ensure the restrictions are reasonable and narrowly tailored as it relates to the employee’s position (higher versus lower-level employee) and the type of business (local hair salon versus multinational business).
- When considering drafting and implementing new restrictive covenants, assess location(s) of workforce and assets that need protection by virtue of restrictive covenants to determine what state laws apply that will affect enforceability. While there is no “one size fits all” approach, agreements can be drafted and implemented in such a way to address multi-jurisdictional corporate interests.
- Remember that many state laws surrounding restrictive covenants require some sort of consideration that goes beyond continued employment, as well as the requirement of sufficient notice and/or attorney consultation by the employee signing the agreement, so make sure you have considered the time and the money that will be needed for the rollout of restrictive covenants to balance the need to protect company assets while adhering to state statutory and common laws.
How and Why Texas Is Different When It Comes to Trade Secrets and Non-Competes
In the fifth webinar of the 2022 series, Seyfarth attorneys Jesse Coleman, Matt Simmons, and Kevin Green discussed legal developments and trends in Texas trade secret and non-compete law and how it is similar to and diverse from other jurisdictions.
- 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.
- Employer plaintiffs should carefully consider whether to bring DTSA and TUTSA claims or just TUTSA claims. In addition to the differences in definitions and forms of relief, properly pleading a DTSA claim gives rise to federal jurisdiction, which allows for filing in removal to federal court and subjects the proceedings the Federal Rules of Civil Procedure instead of Texas Rules of Civil Procedure. An analysis of the pros and cons of each set of rules should be part of any relevant litigation strategy.
How Multijurisdictional Businesses Should Approach Non-Competes
In the sixth installment of the 2022 webinar series, Seyfarth attorneys Dawn Mertineit and Robyn Marsh discussed tips and best practices for multijurisdictional businesses when it comes to restrictive covenants, including non-compete and non-solicitation agreements.
- There is no “one-size-fits-all” way to prepare a restrictive covenants agreement for multiple jurisdictions. Employers should consider whether they want one single agreement that can be used for their entire workforce population (including across multiple jurisdictions, for both new and existing employees, and/or for various tiers of employees), or different permutations. Seyfarth attorneys can help you determine which is the best fit for your business.
- Be wary of overbroad drafting. Even in states in which a court can judicially reform an overbroad agreement, the clear trend does not favor employers who implement extraordinarily broad covenants with an in terrorem effect.
- New legislation is creating more and more challenging hurdles to enforcement of non-competes. Employers should be particularly mindful of fee-shifting provisions (or other financial penalties) and choice of law/forum selection requirements.
Protecting Confidential Information and Client Relationships in the Financial Services Industry
In the seventh webinar in the 2022 series, Seyfarth partners Jeremy Cohen and Kevin Mahoney focused on trade secret and client relationship considerations in the banking and financial services industry.
- When it comes to protecting your secrets, “an ounce of prevention is worth a pound of cure.” Act proactively and consistently in protecting your trade secrets.
- Create a culture of confidentiality.
- Make sure newly-hired employees comply with their obligations to former employer as the consequences can be costly.
- Pay attention to evolving state and federal laws affecting enforceability of restrictive covenants.
- For financial firms and institutions, it is important to understand the interplay between FINRA and the court system. Although the ultimate decision maker will be a FINRA arbitration panel, firms and institutions can still receive significant benefits from pursuing injunctive remedies in a court of law.
- If you are thinking about joining the Protocol for Broker Recruiting, be sure to review your existing agreements before doing so in order to understand what protections you may be giving up once you join the Protocol.
Overview of Non-Compete Legislation and Enforcement Issues from 2022
In the final 2022 webinar, Seyfarth attorneys Kate Perrelli, Dan Hart, and Dallin Wilson discussed new and pending legislation and enforcement issues for non-competes.
- State law on restrictive covenant agreements continues to evolve, with more states imposing compensation thresholds, notice requirements, penalties, and other obligations on employers that make enforcement of restrictive covenants more difficult. Significant changes went into effect in 2022 in Colorado, the District of Columbia, Illinois, and Oregon, with additional states likely to make significant changes in 2023.
- Increased federal attention to restrictive covenants, including attention from the FTC and possible federal legislation, places additional risks on employers.
- Strategies for rolling out and enforcing restrictive covenants should be carefully considered at the time of drafting. Penalties, fee shifting provisions, and putative employee class actions add to risks that employers face.
- Employers should revise their template agreements now if they have not been updated in the past year.
2023 Trade Secret Webinar Series
Starting in January 2023, we will begin another series of trade secret webinars. The first webinar of 2023 will be “2022 Year in Review: What You need to Know About the Recent Cases and Developments in Trade Secrets, Non-Compete, and Computer Fraud Law.” To receive an invitation to this webinar or any of our future webinars, please click here to sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list. Seyfarth Trade Secrets, Computer Fraud & Non-Competes attorneys are happy to discuss presenting similar presentations to your company for CLE credit. Stay up to date on non-compete laws with our recently updated 50 State Non-Compete Guide and by following our Trading Secrets blog, where we write on topics and issues related to trade secrets and non-competes.