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On August 13, 2021, Governor Pritzker signed into law Public Act 102-0358, which amends the Illinois Freedom to Work Act and sets forth specific requirements for the enforceability of restrictive covenant agreements in Illinois for agreements entered into on or after January 1, 2022.

Income Thresholds
To be enforceable, as of the law’s effective date, non-compete agreements may only be used with employees earning more than $75,000 per year, and more than $45,000 per year for non-solicit agreements. For purpose of this new law, “earnings” includes all salary, earned bonuses and commissions, and any amounts electively deferred by the employee, such as contributions to a 401(k) plan. In addition, for non-competes, the earnings threshold will increase to $80,000 in 2027, $85,000 in 2032, and $90,000 in 2037, and for non-solicits, the threshold will increase to $47,500 in 2027, $50,000 in 2030, and $52,500 in 2037.

Codification of Fifield Rule
As we previously discussed, Illinois courts have held that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant. Through Public Act 102-1358, Illinois codified the so-called Fifield Rule by defining adequate consideration to be either two years of employment post-execution of a restrictive covenant agreement or some other consideration, such as “additional professional or financial benefits.” While such additional “benefits” remains undefined, presumably, a promotion, bonus, or other financial benefit will satisfy the adequate consideration requirement.

14 Day Notice Period
Similar to some other states, including Oregon and Massachusetts, Illinois will now require employers to provide a written copy of the restrictive covenant agreement to the employee 14 days prior to employment commencing and advise the employee to consult with an attorney.

Employee Right To Recover Attorneys’ Fees
Regardless of whether the employment agreement allows the prevailing party the right to recover attorneys’ fees, employees with agreements entered into after January 1, 2022, will now be able to “recover from the employer all costs and all reasonable attorney’s fees” regarding any claim to enforce a covenant not to compete or covenant not to solicit.

Reformation Guidance
We previously cautioned that employers should not depend on Illinois to blue pencil or reform overly broad restrictive covenant agreements. That advice will not change. Public Act 102-0358 provides specific guidance discouraging “extensive” reformation and provides specific factors a court may consider regarding whether to reform, including “The fairness of the restraints as originally written” and “whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer.”

As a consequence of Public Act 102-0358, Illinois employers should promptly consult legal counsel to update their restrictive covenant agreements and hiring practices prior to January 1, 2022 to: (1) comply with the 14 day notice provision; (2) consider the strategy for ensuring adequate consideration; and (3) revising the scope of restrictive covenants to be no broader than necessary to provide the employer the best chance for enforcement (and to avoid paying an employee’s legal fees in opposing any such action).

Earlier this month, Plaintiff Bright Side, LLC dba Herbal Edibles, a manufacturer of cannabis edibles, filed a lawsuit in New Mexico state court to enforce a 3-year non-compete and enjoin the misappropriation of its trade secret cannabis recipes by one its former bakers, Christina Johnson.

Based on the complaint, Ms. Johnson had been employed by Herbal Edibles as a baker for less than one year when she was terminated. Ms. Johnson allegedly started her own competing business, selling cannabis edibles such as “psychedelic sugar cookies” through Instagram and an open air market. Continue Reading Cannabis Baker’s Plans of Own Business Potentially Put On Backburner

Since we last wrote about DC’s sweeping ban on non-competes (the “Act”), there have been many questions and concerns, not surprisingly. And now those have spilled over into deliberations before the DC Council, leading to Councilmember Elissa Silverman’s introduction of the Non-Compete Conflict of Interest Clarification Amendment Act of 2021 on May 21, 2021. Councilmember Silverman and others hope to limit the new non-compete law before it gets funded with an effective date of March 16, 2021. While helpful, the Silverman proposals are extremely limited in scope, and so others have chimed in, leading to a potential delay of the Act’s implementation. Continue Reading District of Columbia Councilmembers Seek Clarification on Non-Compete Ban

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.