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shutterstock_295640804By Christopher Lowe and Robert T. Szyba

In a recent ruling, the New Jersey Supreme Court gave employers a great recourse for dealing with former employees who breach their duty of loyalty.  In Bruce Kaye v. Alan P. Rosefielde, the Court allowed an employer to recover compensation paid to a disloyal, recently terminated, employee, even where the employer sustained no economic hardship from the employee’s acts of disloyalty.

Background

In Kaye, the employee, an attorney, who was only licensed to practice in New York, was hired as Chief Operating Officer (“COO”) and General Counsel for plaintiff’s business selling and managing timeshares in Atlantic County, New Jersey.  Interestingly, although the defendant’s contract refers to his salary as a retainer for his services, and it appeared that both parties intended  defendant to be an independent contractor, both parties agreed that defendant performed the services of an employee rather than an independent contractor.

While employed in the hybrid COO/General Counsel role — earning a salary of  $500,000 per year — the Court found that the employee committed a number of “egregious” acts that ultimately resulted in the termination of his employment, including: (1) expensing a $4,000 personal trip to Las Vegas, the cost of which included a hotel suite with three “adult film stars”; (2) fraudulently applying for health insurance; (3) forging signatures on false quitclaim deeds of defaulting timeshare owners; (4) carved out a greater-than-agreed-upon personal interest in one of his employer’s corporate entities; (5) creating an entity under his employer’s name, without his employer’s consent, taking a 20% interest in that entity for himself (the employee); and (6) making numerous sexual advances towards other employees.  When the employer learned what was going on, he fired the employee and sued him for breach of fiduciary duty, fraud, legal malpractice, unlicensed practice of law, and breach of duty of loyalty.

The Trial and Appellate Courts

After a 26-day bench trial, the trial court found that the former employee breached his duty of loyalty to the employer, and committed legal malpractice and fraud.  The employer was awarded $4,000 for the Las Vegas trip, over $800,000 in counsel fees and costs, and rescission of all of the employee’s ill-gotten interests in the employer’s other companies.  But despite it being “difficult to imagine more egregious conduct by a corporate officer,” the trial court declined to order equitable disgorgement for the former employee’s compensation during the period of disloyalty.  The trial court interpreted a prior Supreme Court decision, Cameco, Inc. v. Gedicke, as holding that “in order to compel disgorgement of a disloyal employee’s compensation, a court must first find that ‘the employee’s breach proximately caused the requested damages.’”  The Appellate Division agreed with the trial court on that point and affirmed that the employer could not disgorge the compensation paid to the disloyal former employee because it could prove no actual harm.

The New Jersey Supreme Court granted certification only to address the specific question of “whether a court may remedy disgorgement of a disloyal employee’s salary to an employer that has sustained no economic damages.”

The Court reversed the courts below, holding that disgorgement is an equitable remedy within the trial court’s authority, including where a disloyal former employee’s misconduct is not tied to an economic loss suffered by the employer on account of the employee’s disloyalty.  The Court directed lower courts to consider four factors to determine whether an employee breaches his/her duty of loyalty:

(1) the existence of contractual provisions relevant to the employee’s actions;

(2) the employer’s knowledge of, or agreement to, the employee’s actions;

(3) the status of the employee and his/her relationship to the employer (for example, corporate officer or director versus production line worker); and

(4) the nature of the employee’s conduct and its effect on the employer.

In effect, courts are directed to consider “the parties’ expectations of the services that the employee will perform in return for his or her compensation, as well as the ‘egregiousness’ of the misconduct that leads to the claim.”

The Court further clarified that once the employee is found to have breached the duty of loyalty, courts should decide whether disgorgement is a proper remedy by considering: “[t]he employee’s degree of responsibility and level of compensation, the number of acts of disloyalty, the extent to which those acts placed the employer’s business in jeopardy,” “the degree of planning to undermine the employer that is undertaken by the employee,” as well as “other factors” that may be relevant.  And once disgorgement is found to be appropriate, the court suggested apportionment commensurate to misconduct at issue, as opposed to “wholesale disgorgement.”

Outlook for Employers

New Jersey employers scored a significant win and a meaningful tool to deter and redress a breach of an employee’s duty of loyalty.  The Kaye Court addressed the circumstance of a disloyal employee who’s employment was terminated, however the analysis  is certainly  instructive in addressing situations with current employees.  The ability to recoup some or all of a disloyal employee’s salary/compensation is certainly a powerful tool in the right circumstances, and certainly something to consider when faced with a breach of the duty of loyalty.

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By Robert T. Szyba and Jade Wallace

In a pivotal decision with broad implications for aspiring New Jersey whistleblowers, yesterday the New Jersey Supreme Court affirmed the Appellate Division’s finding that no qualified privilege exists to protect an employee from criminal prosecution for taking confidential documents from her employer under the guise of gathering evidence for an employment lawsuit.

In State v. Saavedra, A-68-13 (June 23, 2015), a former public employee, Ivonne Saavedra, was criminally indicted on charges of second-degree official misconduct and third-degree theft of public documents after taking hundreds of highly confidential original and photocopied documents from her former employer, the North Bergen Board of Education.  These documents, which contained sensitive personal information, such as individual financial and medical information regarding individual minor students, were taken by Saavedra in support of her whistleblower retaliation and discrimination claims against the Board.  Saavedra alleged that she was a victim of gender, ethnic, and sex discrimination, as well as hostile work environment and retaliatory discharge.

Saavedra moved to dismiss the indictment, arguing that, in Quinlan v. Curtis-Wright Corp., 204 N.J. 239 (2010), the New Jersey Supreme Court “establishe[d] an absolute right for employees with employment discrimination lawsuits to take potentially incriminating documents from their employers.”  In Quinlan, the plaintiff’s employment was terminated after her employer discovered that the plaintiff copied about 1,800 pages of confidential information without authorization, and gave them to her attorney to use in the lawsuit. The plaintiff added a claim of retaliation to her lawsuit and was awarded a multimillion dollar verdict. The New Jersey Supreme Court upheld the jury verdict, finding that the plaintiff had engaged in protected activity that could not lawfully serve as a grounds for termination.

Analyzing Saavedra’s argument, the Appellate Division found that Quinlan did not apply in criminal cases, and instead of a bright-line prohibition against taking company documents, established a totality-of-the-circumstances test for use in civil litigation.

The New Jersey Supreme Court agreed.  It confirmed that the “decision in Quinlan did not endorse self-help as an alternative to the legal process in employment discrimination litigation. Nor did Quinlan bar prosecutions arising from an employee’s removal of documents from an employer’s files for use in a discrimination case, or otherwise address any issue of criminal law.” On the contrary, the Court explained that the Quinlan decision stands for the proposition that an employer’s interest must be balanced against an employee’s right to be free from unlawful discrimination when assessing whether an employee’s conduct in taking documents from his or her employer constitutes a protected activity.  The Court pointed to the discovery procedures available to litigants that would have provided Saavedra access the same documents that she took, but would have allowed the trial court the opportunity to balance her interests with the Board’s interests, including any concerns about the privacy of minor students and their parents.

Despite the fact that the Court declined to provide an automatic shield from prosecution under Quinlan, the Court pointed out that in such circumstances, the employee will nevertheless be able to assert a claim of right defense or a justification.  Thus, the employee will still be able to assert that his or her taking of the employer’s documents was justified.  And there, the Court suggested, Quinlan’s guidance may assist the trial court in analyzing the particular facts and circumstances to determine whether the employee can assert this defense.

The New Jersey Supreme Court has thus clarified that although self-help tactics may be justifiable in certain circumstances, Quinlan did not establish or endorse an unfettered right of employees to surreptitiously take documents from the workplace for their own use in litigation or otherwise.  New Jersey employers, especially those who may be concerned with customer identity theft and data breaches, have won an important victory to assist in guarding against the unauthorized, and often covert, taking of confidential documents and information.

Robert T. Szyba and Jade Wallace are associates in the firm’s New York office. If you would like further information, please contact a member of the Whistleblower Team, your Seyfarth Shaw LLP attorney, Robert T. Szyba at rszyba@seyfarth.com, or Jade Wallace at jwallace@seyfarth.com.

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By Jessica Mendelson and Grace Chuchla

Litigants ought to think twice before deleting their Facebook profiles.  Just this month, a New Jersey federal judge issued sanctions against a litigant in a personal injury case for deleting his Facebook profile after agreeing to grant defense counsel access to the profile.

In Gatto v. United Air Lines, the plaintiff, Gatto was a former ground operations supervisor at John F. Kennedy International Airport in New York.  Gatto sued as a result of injuries he allegedly incurred on the job.  Gatto claimed a set of  fueler stairs had crashed into him allegedly resulting in permanent disabilities which left him unable to work.

During the discovery phase of the case, the defendants sought discovery of Gatto’s social networking sites.  The parties agreed Gatto would provide his password to defense counsel after he had changed it.  Defense counsel subsequently logged into Gatto’s Facebook account and printed out portions of his Facebook page.  Defendants also sent a signed authorization to Facebook so that they could access the account, but Facebook objected, suggesting that defendants ask Gatto to download his own account information.

Following the defendants’ access of  his Facebook account, Gatto allegedly received notice that his account had been accessed from an unfamiliar IP address.  Gatto deactivated the account allegedly for fear it had been hacked.  This led to the deletion of the contents of the account, and defendants brought a motion for spoliation sanctions.

The court held that to issue sanctions, it needed to find four factors: “(1) the evidence was within Gatto’s control; (2) the evidence was actually suppressed or withheld by Gatto; (3) the destroyed evidence was relevant to claims or defenses in the case; and (4) Gatto should have reasonably foreseen that the evidence would be discoverable.

The court found that the first, third, and fourth factors were present.  Gatto argued that he did not intend to destroy anything, but rather, deactivated the account because he had previously been hacked, and feared it was happening a second time.  The court, however, noted that the adverse inference instruction was designed to level the playing field if one party has been prejudiced by destruction, and therefore, whether Gatto actually had intent was “largely irrelevant.” No matter his excuse, Gatto “effectively caused the account to be permanently deleted,” which rendered a spoliation inference appropriate. As such, the court permitted an instruction to be given to the jury that they may draw adverse consequences from the deletion of Gatto’s profile.

Gatto is just the most recent case on the discovery of social media and the consequences for the spoilation of such of evidence, and there will likely continue to be more in the future.  Recently, in Lester v. Allied Concrete Co., a Virginia court sanctioned a party and his lawyers in a wrongful death suit for intentionally destroying a Facebook page.  In that case, the opposing party requested discovery of the contents of the plaintiff’s Facebook page after it obtained a photo of the plaintiff wearing an  “I ♥ hot moms” T-shirt.  After the plaintiff had been questioned about the shirt at deposition, his attorney instructed him to “clean up” the account to prevent “blowups of this stuff at trial.”  The account was removed, and defense counsel was told that the plaintiff had no Facebook page.  The account was later reactivated and the contents were produced, with the exception of a number of objectionable photos.  Although the jury found in favor of the plaintiff, the court sanctioned plaintiff and his attorney for spoliation as a result of the deletion of the page.

Gatto and Lester are important as both cases suggest the changing face of discovery as a result of the prevalence of social media in today’s world.  A social media profile is by no means safe from discovery, and as a result, parties should be careful about what is being revealed online.  Parties to ongoing litigation should be careful not to delete or deactivate their accounts, as they may be fair game for discovery. Social media profiles have become the source of highly relevant and discoverable evidence and should be treated with the same preservation care that any other hard copy documents and traditional forms of electronically stored information are given during litigation.  

By Jessica Mendelson and Grace Chuchla

Employers in the Second Circuit are thankful for a recent non-compete summary order in which the Court found that an employee’s challenge of his non-compete agreement by way of a preliminary injunction motion failed because he failed to show irreparable injury.

Specifically, the Court found that an employee’s potential loss of income does not qualify as an irreparable injury in determining whether to invalidate a non-compete agreement and issue injunctive relief. In sum, in Hyde v. KLS Professional Advisors Group, the Second Circuit vacated a preliminary injunction issued by a New York federal district court, and in doing so, provided noteworthy insight on what constitutes irreparable injury with respect to the challenges by employees of non-compete agreements in the Second Circuit.

The facts in this case are fairly straightforward. Bruce Hyde (“Hyde”) resigned from KLS Professional Advisors Group (“KLS”), and he then filed suit and obtained a preliminary injunction preventing the enforcement of the restrictive covenants that Hyde had signed at the beginning of his employment with KLS. The covenants prohibited Hyde from contacting any of the firm’s past, present, or future clients for three years following his departure from KLS.

In reviewing the district court’s grant of a preliminary injunction, the Second Circuit reversed the preliminary injunction granted by the district court, finding that Hyde had clearly failed to show irreparable harm. According to the Second Circuit, irreparable harm was the “single most important prerequisite for the issuance of a preliminary injunction.” Fiaveley Transportation Malmo AB v. Wabtec Corp, 559 F.3d 110, 118 (2nd Cir. 2009).

According to the Court, prior to this case, the Second Circuit had yet to directly address the question of irreparable harm in the context of a challenge by an employee of his non-compete agreement. The reasoned, however, that in both the Supreme Court’s opinion in Sampson v. Murray, 415 US 61 (1974), and the Second Circuit’s opinion in Savage v. Gorski, 850 F.2d 64 (2d Cir. 1988), the courts denied requests for injunctions by government employees who had sought injunctions to keep or extend the jobs. Based on these cases, the Court reasoned, in what must have been a turkey of a decision for Hyde, that loss of employment and any difficulties arising therein do not constitute irreparable injury. Therefore, Hyde’s alleged showing that his restrictive covenant inhibited his ability to find a new job was insufficient to satisfy the irreparable harm requirement. The Court reasoned that “difficulty in obtaining a job is undoubtedly an injury, but it is not an irreparable one” as any harm suffered could be adequately compensated with monetary damages at trial.

Hyde also argued that his restrictive covenanst caused him irreparable harm through a loss of client relationships. The Court, however, quickly rejected that argument given that “Hyde had signed multiple agreements in which he acknowledged that KLS’s client base was proprietary and belonged to the firm.” Furthermore, even if the Court were to assume that Hyde had a legally protected interest in his client list, he had failed to demonstrate that losses related to his client list could not be remedied with monetary damages.

The Second Circuit’s ruling may be helpful to employers seeking to enforce non-compete agreements against their former employees and also provide them with helpful reasoning should former employees challenge their non-compete agreements.

Can Employees Steal Trade Secrets & Confidential Information To Support Their Whistleblower Claims?

The answer: It depends who is adjudicating the case, as a sharp conflict recently has arisen on this issue between federal and state courts and the U.S. Department of Labor (DOL). The DOL’s Administrative Review Board (ARB) recently suggested that such activities may indeed qualify as protected activity under the whistleblower protection provisions in the Sarbanes-Oxley Act. The ARB acknowledged the acute tension between employer confidentiality policies and employee whistleblower bounty programs, like those in the Dodd-Frank Act, which preclude enforcement of confidentiality agreements. Although the New Jersey Supreme Court took a similar approach, numerous federal courts have renounced such resorts to "self-help" and bypassing of civil discovery rules. What does this mean for companies seeking to protect their trade secrets and confidential information? How should management and board members respond in the face of these decisions and their seemingly competing obligations to protect assets such as trade secrets and confidential information — which often are a company’s most valuable assets?

This webinar will discuss the following topics:

  • Recent decisions addressing the interplay between maintaining employer confidentiality and protection of trade secrets and protected activity under whistleblower statutes and “self-help” discovery;
  • The provisions in whistleblower bounty programs that preclude enforcement of confidentiality agreements;
  • The duty to safeguard trade secrets and confidential information under various statutes;
  • Appropriate procedures and strategies for protecting company secrets; and
  • Tips to address anonymous whistleblowers in the Internet and social media age.

The webinar will be hosted by attorneys Steve Pearlman and Robert Milligan, on Tuesday, March 27, 2012, from 10:00 a.m – 11:00 a.m. Pacific.

There is no cost for attending this webinar, however, registration is required.  You can register here. CLE credit is available in California, Illinios, and New York.

By Robert Milligan, David Monachino, and Jeffrey Oh

With Governor Chris Christie’s signature on January 9, 2012, New Jersey became the 47th state to adopt a form of the Uniform Trade Secrets Act (UTSA). Previously governed by common law, trade secrets of persons or entities in New Jersey will now have statutory protection under the New Jersey Trade Secrets Act (S-2456/A921). The new statute went into effect immediately after its signing, and applies to all new claims which arise on or after January 9, 2012.

To read the full text of the law, please visit this website.

Effects of the Act on Trade Secret Protection in New Jersey

The New Jersey Trade Secrets Act (NJTSA) sets forth clear statuatory language for trade secret protection for the first time in the state, including defining what a trade secret is as well as what acts constitute misappropriation of a trade secret. Prior to the Act, trade secret analysis relied on the Restatement of Torts, pursuant to New Jersey cases such as Sun Dial Corp. v. Rideout (1954), making protection somewhat inconsistent as varying interpretations of the common law were applied.

Protections afforded to persons and entities with valid trade secret claims under the NJTSA include injunctive relief for “actual or threatened misappropriation,…a reasonable royalty” for misappropriation, and monetary damages (compensating for both actual losses as well as “unjust enrichment caused by the misappropriation”). In addition, for cases of “willful and malicious misappropriation,” attorney fees may be recovered and punitive damages may be awarded for up to two times the damages otherwise awarded. There is also no statutory requirement to identify trade secrets prior to commencing discovery unlike some jurisdictions.

Variations between the UTSA and NJTSA

Despite being based on the UTSA, the New Jersey legislature did make certain adjustments in drafting its state’s trade secret statute. One such adjustment was the exclusion of a clause present in the UTSA which directs courts to take trade secret rulings in other states into account when handing down decisions. Another key difference between the UTSA and NJTSA is the NJTSA’s explicit mention that the provisions of the act are “in addition to and cumulative of any other right, remedy or prohibition provided under the common law or statutory law of this State.” In practice, this allows confidential and proprietary information that does not satisfy the trade secret requirements set forth by the act, but was previously protected under the state’s common law, to remain protected.  This in contrast to some states who have adopted adapted versions of the UTSA, many of which take the stance of preemption of common law claims. Finally, the NJTSA contains more robust protections for the preservation of trade secrets in the court system than in the standard UTSA. Courts are directed to use “reasonable means” to ensure the protection of trade secrets during litigation, including sealing court records when necessary, limiting disclosure of trade secrets to attorneys’ eyes only, and granting protective orders during discovery. This is particularly significant because some jurisdictions are reluctant to seal court records even in trade secrets cases.

Advice for Employers

The NJTSA offers companies statutory protections for trade secrets, though it is their responsibility to ensure this protection by making “efforts that are reasonable under the circumstances to maintain its secrecy.” To accomplish this, companies should have explicit policies preventing disclosure of their trade secrets while also being vigilant in educating employees of their responsibilities. Any suspicion of trade secret misappropriation by an employee or competitor should be investigated immediately in order to prevent the loss of rights in trade secret protection. Under the NJTSA, the statute of limitations for bringing a misappropriation claim has been reduced from six years, to three years from discovery of the misappropriation. An attorney with knowledge and experience in litigating trade secret claims is best suited to guide companies through this process.

Questions for the Future

With New Jersey joining the other 46 states who have passed some form of trade secret protection legislation, just three states, Texas, New York and Massachusetts, have yet to adopt a variation of the UTSA. It will be interesting to se how the New Jersey courts construe the new law, including "threatened misappropriation" and preemption of common law claims. How long these hold-outs will remain reliant on common law protections is an important discussion moving forward. Part of the UTSA’s goal when drafted in 1979 was to address the disparity in trade secret protection across state lines, and to that end there has been some interest in Congress in instituting federal civil trade secret protections, but the scope and preemptive effect of such legislation is entirely uncertain

 

 

Legislation intended to help protect the trade secrets of New Jersey businesses has been signed into law by Gov. Christie. The New Jersey Trade Secrets Act (S-2456/A-921) establishes by law specific remedies available to businesses in the event that a trade secret – such as a formula, design, a prototype or invention – is misappropriated. New Jersey was one of the four remaining states that have not adopted some or all of the provisions of the Uniform Trade Secrets Act (Massachusetts, New York and Texas are the others), but instead NJ courts have relied wide range of common law decisions in order to establish a trade secret misappropriation claim.

The New Jersey Senate approved the bill 39-0; the Assembly approved the measure 79-0. The law takes effect immediately, except it does not apply to misappropriation that occurred prior to the effective date or to a continuing misappropriation that began prior to the effective date of the law and continued after the effective date of the law.

The new law provides for damages for both actual loss suffered by a plaintiff and for any unjust enrichment of the defendant caused by the misappropriation of trade secrets. Damages also may include a reasonable royalty for unauthorized disclosure or use of the trade secrets. In cases of willful misappropriation, punitive damages and attorneys’ fees may be awarded. In addition, if a claim for misappropriation is brought in bad faith, attorneys’ fees may be awarded.

The New Jersey Act also has a couple of unique and helpful provisions, including a requirement that a court "preserve the secrecy of an alleged trade secret by reasonable means consistent with" court rules. There is also "a presumption in favor of granting protective orders in connection with discovery proceedings" as well as provisions limiting access to confidential information to only the attorneys for the parties and their experts, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.

It remains to be seen if New York will now follow New Jersey’s lead and adopt similar legislation.

By David Monachino

New Jersey is one of the four remaining states that have not adopted some or all of the provisions of the Uniform Trade Secrets Act (Massachusetts, New York and Texas are the others), but instead NJ courts have relied wide range of common law decisions in order to establish a trade secret misappropriation claim. On September 26, 2011, the New Jersey Senate approved a bill known as the “New Jersey Trade Secrets Act” (A – 921), which provides statutory remedies and procedural guidance for the misappropriation of trade secrets. This proposed bill provides for damages for both actual loss suffered by a plaintiff and for any unjust enrichment of the defendant caused by the misappropriation of trade secrets. Damages also may include a reasonable royalty for unauthorized disclosure or use of the trade secrets. In cases of willful misappropriation, punitive damages and attorneys’ fees may be awarded. In addition, if a claim for misappropriation is brought in bad faith, attorneys’ fees may be awarded.

The New Jersey Act also has a couple of unique and helpful provisions, including a requirement that a court “preserve the secrecy of an alleged trade secret by reasonable means consistent with” court rules. There is also “a presumption in favor of granting protective orders in connection with discovery proceedings” as well as “provisions limiting access to confidential information to only the attorneys for the parties and their experts, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.”

The NJ Assembly has to vote on the Senate’s amended version of the bill before it is presented to Governor Chris Christie for his signature. The bill is expected to be voted upon after the November recess and Governor Christie then has 45 days to sign the bill into law. If the bill is singed, it will become effective immediately, but will not be retroactive. Assuming the law eventually passes, it is still important for companies doing business in NJ to define what may constitute proprietary information, especially if that definition is broader than the “trade secret” definition found in the statute. Either way — whether the bill passes or not — it remains important for a business to continue to take reasonable efforts to maintain the secrecy of any information that it deems confidential or risk losing trade secret protection.

An article published yesterday in the Gonzaga Law Review presents an interesting analysis of trade secret litigation in state courts. Authors David S. Alming, Darin W. Snyder, Michael Sapoznikow, Whitney E. McCollum, and Jill Weader published the follow-up article to their article last year concerning trade secret litigation in federal courts. According to the new article, they analyzed 2,077 state appellate court decisions issued between 1995 and 2009 and coded 358 of them for 17 relevant factors.

Here are some interesting findings from their article:

• In more than 90% of trade secret cases in both state and federal courts, the alleged misappropriator was either an employee or business partner of the trade secret owner.
• Just five states account for about half of all trade secret litigation in state appellate courts. California leads the pack (16% of cases), followed by Texas (11%), Ohio (10%), New York (6%), and Georgia (6%).
• State appellate courts affirmed 68% of trade secret decisions and reversed 30% of them.
• State appellate courts favor defendants. Alleged misappropriators (the defendants) prevailed in 57% of cases and trade secret owners (the plaintiffs) prevailed in 41%.
• State courts appear to be a tougher venue for trade secret owners who are suing business partners than for those suing employees. Trade secret owners won 42% of the time on appeal when the owner sued an employee, but only 34% when the owner sued a business partner.
• For decades following its 1939 publication, the Restatement (First) of Torts “was almost universally cited by state courts, and in effect became the bedrock of modern trade secret law.” James Pooley, Trade Secrets § 2.02[1] (2010). Those days are over. Only 5% of the cases in the state study cited the Restatement.
• Unlike federal courts, which cite persuasive authority in more than a quarter of cases, state courts cited persuasive authority in only 7% of cases.
• In contrast to the exponential growth of trade secret litigation in federal courts, trade secret litigation in state appellate courts is increasing, but only in a linear pattern at a modest pace.
• Of all the reasonable measures trade secret owners took, only two statistically predicted that the court would find that this element was satisfied: confidentiality agreements with employees and confidentiality agreements with third parties.

 

A wooden gavel on a white marble backdrop.
Tingey Injury Law Firm, Unsplash

On December 4, 2024, the Federal Trade Commission (“FTC”) ordered building services contractor Guardian Industries, Inc. (“Guardian”) to cease enforcement of no-hire provisions it included in customer service agreements with residential building owners and building management companies, prohibiting the hire of Guardian’s employees.

Guardian, which operates in New York and New Jersey, was on the receiving end of a complaint before the FTC, claiming that the use of no-hire agreements was anti-competitive because they “eliminate direct, horizontal, and significant forms of competition” in the building services industry.  Id. at ¶ 12.  The FTC explained that building owners and property management companies directly or indirectly employ almost 900,000 mostly low-wage workers in the United States in buildings of all kinds, and that Guardian and its customers are “direct competitors in certain labor markets” for workers in building services (e.g. custodial, maintenance, concierge, or security).  More specifically, under Guardian’s no-hire agreements, building managers are prohibited from hiring Guardian employees even after the termination of a building’s contract with Guardian, irrespective of the position they hold with Guardian and a position they might potentially want to accept with a building manager. In effect, the no-hire provisions operated as what is commonly referred to as “janitor clauses,” which indiscriminately restrict the scope of an employee’s future employment, unrelated to the company’s legitimate business interests, preventing an employee from moving to a competitor in any capacity (even as a janitor, hence the colloquial name).

As a result, by employing the use of no-hire provisions in its customer service agreements, the FTC alleged Guardian was inhibiting free competition and restricting employee mobility, in violation of Section 1 of the Sherman Act and Section 5 of the FTC Act.  In short, the FTC asserted that Guardian’s conduct constituted an “unfair method of competition” that harmed both consumers and employees in the building services industry.  Pursuant to the FTC’s proposed consent order, Guardian must cease and desist from—directly or indirectly—enforcing a no-hire agreement or communicating to any prospective or current customer that a Guardian employee is subject to a no-hire agreement. Nor can Guardian enforce or attempt to enforce, or even maintain or attempt to maintain, a no-hire agreement with its competitors.  Additionally, under the proposed consent order, Guardian must:

  • Provide notice to customers and Guardian employees with a copy of the FTC’s order that shows that the no-hire agreement is no longer in effect.
  • Post “clear and conspicuous” notice to each new Guardian employee upon hire and in any shared Guardian employee space, such as a breakroom, stating that their employment will not be subject to a no-hire agreement.
  • Take all steps necessary to void and nullify all existing no-hire agreements and notify Commission staff in writing that all existing no-hire agreements are voided and nullified.
  • Not require any person who is party to an existing no-hire agreement to pay any fees or penalties relating to a no-hire agreement.

FTC Chair Lina M. Khan issued a statement in support of the consent order, proclaiming:

[t]he ability to freely switch jobs is a pillar of economic liberty. Business practices that block people from doing so can depress workers’ paychecks and infringe on their freedoms. Challenging conduct that restricts workers’ mobility or undermines fair competition in labor markets has been a top priority of the Commission in recent years.

Commissioners Melissa Holyoak and Andrew Ferguson each issued separate dissenting statements in opposition to the FTC consent order, asserting that the FTC exceeded its authority in issuing the complaint against Guardian, failing to demonstrate violations of the Sherman Act and FTC Act.  

As we have extensively reported in the past year, the FTC is continuing to focus on the use of restrictive covenants (including, but not limited to, non-compete clauses) in agreements, and this recent order on the use of no-hire agreements between competitors is no exception. It remains to be seen whether this will be a continued focus of the FTC with the incoming Trump administration, especially given that as of December 10, Trump announced he selected Ferguson to replace Khan as the next chair of the FTC.  Arguably, the use of no-hire agreements is intended to protect the sanctity of a stable workforce, but a less draconian and more reasonable approach would likely be the use of narrowly drawn non-solicit provisions, tailored to express business interests it seeks to protect. Guardian may well have been able to maintain such a reasonable no-hire provision had its agreements not overreached so far; instead, this serves as a cautionary tale to businesses that impose covenants that extend beyond their legitimate business interests, even if they do not intend to enforce them (fully or at all).

For further guidance, you can learn about the use of employee restrictive covenants in our 50-State Non-Compete Desktop Reference, a trusted resource for navigating the complexities of non-compete, non-solicit, and trade secrets law across the United States.