Commercial Litigation Outlook

We invite you to watch our webinar, the second installment of the Commercial Litigation Outlook series, titled “Navigating Legal Minefields: Insights on Restrictive Covenants, eDiscovery, and Privacy Compliance.” Our panel, consisting of Rebecca Woods, Dawn Mertineit, James Yu, Jason Priebe, and Matthew Christoff, dissected the ever-evolving world of non-competes and trade secrets.

Here are the key takeaways from the webinar:

  • State legislatures and federal agencies continue to take aim at non-competes, so employers should consult with knowledgeable counsel and draft agreements that are not broader than necessary. Perhaps most notably, the FTC is on the cusp of announcing a rule regarding non-compete enforceability which is expected to ban virtually all such agreements (although we anticipate any such rule will be challenged in court almost immediately).
  • Even without legislation, court decisions continue to evolve the non-compete landscape, as seen in Delaware’s trend against reforming overbroad agreements (even in the sale of a business context).
  • While non-competes are the main focus, even non-solicits and non-disclosure agreements may be invalidated under various statutes, federal rules, or court decisions if they are deemed too broad.

To view the webinar recording, click here.

Tuesday, May 28, 2024
1:00 p.m. to 2:00 p.m. Eastern
12:00 p.m. to 1:00 p.m. Central
11:00 a.m. to 12:00 p.m. Mountain
10:00 a.m. to 11:00 a.m. Pacific

REGISTER HERE

About the Program

In today’s ever-evolving and interconnected world, trade secret protection demands proactive measures against both technological vulnerabilities and human threats. Join us for the fourth installment of our 2024 Trade Secrets Webinar Series, where our panel of seasoned trade secrets and cybersecurity attorneys will equip you with practical strategies to bolster your defenses.

Key topics to be addressed include:

  • The current cybersecurity and data privacy landscape: new threats and opportunities posed by emerging technologies.
  • The importance of implementing reasonable precautions to safeguard trade secrets.
  • Real-world case studies exemplifying effective trade secret protection strategies.
  • Identification and mitigation of the evolving vulnerabilities associated with trade secret theft.
  • Implementing best practices for securing confidential information in the digital domain.
  • Leveraging industry-standard cybersecurity protocols to fortify your organization’s security posture.

Speakers

Jesse Coleman, Partner, Seyfarth Shaw LLP
Kevin Mahoney, Partner, Seyfarth Shaw LLP
Kathleen McConnell, Partner, Seyfarth Shaw LLP

If you have any questions, please contact Joan Gwak at jgwak@seyfarth.com and reference this event.

Learn more about our Trade Secrets, Computer Fraud & Non-Competes practice.

Our 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 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.

The FTC announced today that it will be hosting a special virtual open meeting on April 23, 2024, at 2:00 p.m. Eastern to discuss its proposed final rule regarding non-competes.

According to the FTC, on the agenda, is the FTC’s proposed rule to ban noncompete clauses:

The Commission will vote on whether to issue a proposed final rule that would prevent most employers from enforcing noncompetes against workers. The proposed final rule being considered would generally prevent most employers from using noncompete clauses. As the Notice of Proposed Rulemaking explained, noncompetes are a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. The proposed final rule the Commission will consider stems from the notice of proposed rulemaking the FTC issued in January 2023, which was subject to a 90-day public comment period.

At the start of the meeting, the Commission will vote on whether to authorize public disclosure of the proposed final rule that is under consideration. Then, Chair Khan will offer brief remarks. Next, if the Commission votes to authorize public disclosure of the final rule under consideration, the Office of Policy Planning will give a staff presentation on the final noncompete rule under consideration. Finally, the Commission will vote on whether to issue the final rule.

After announcing the Notice of Proposed Rulemaking, the FTC received more than 26,000 comments from members of the public. Given the extremely high volume of public input already received and given that the public comment period on the proposed rule closed in April 2023, the Commission will not be taking further comments from the public during the April 23 Open Commission Meeting. The public, however, can watch the meeting via webcast, which will be available on the day of the event shortly before the meeting starts at FTC.gov. The event will be recorded, and the webcast will be available on the Commission’s website after the meeting.

The FTC previously proposed the rule in January of 2023 and sought the public’s comment. The final proposed rule is expected to be challenged by various business groups.

Employers should carefully monitor the breadth of the proposed final rule likely announced next Tuesday. While some advocated that the ban should be limited to low wage workers, FTC leadership has previously indicated that the ban should apply for all workers because they believe non-competes harm competition no matter if the impacted employee is a senior executive or low wage worker.

The business community is also closely monitoring whether the proposed final rule modifies the exception to the ban on non-compete clauses with workers involving the sale of a business. In the initial proposed rule, the exception to non-compete ban with workers would only be available where the party restricted by the non-compete clause (also a worker under the proposed rule) is an owner, member, or partner holding at least a 25% ownership interest in a business entity. Some commentators argued that such an exception should not have a percentage threshold or alternatively that any percentage threshold should be set much lower. Additionally, some commentators have suggested that the FTC provide greater clarity concerning the scope of the non-compete ban with respect to business transactions and impacted sellers/workers (e.g. key employees with rollover equity).

Additionally, employers are monitoring whether the final proposed rule includes a ban on other employment terms that purportedly amount to “de facto” noncompete clauses under the FTC’s proposed functional “effect” test. The FTC previously offered the following examples as terms that may be de facto non-compete clauses according to the agency:

i. A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.

ii. A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.

While litigation is likely to ensue concerning the FTC’s authority to issue the non-compete ban and the issue may ultimately work its way up to the Supreme Court, impacted businesses should comply with applicable state non-compete laws and ensure that their trade secret protections are up to date and effective in the meanwhile.

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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.

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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.

Blue pen on a non compete contract. Noncompete contract is an agreement between employee and employer, not to enter into competition in subsequence business effort. Legal concept.
Blue pen, a gun or a pistol on a non compete contract. Noncompete contract is an agreement between employee and employer, not to enter into competition in subsequence business effort. Legal concept.

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.

Commercial Litigation Outlook

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.

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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.