On March 7, 2019, a group of six United States senators from both sides of the aisle submitted a letter to the Government Accountability Office (GAO) requesting a federal investigation into the use of non-compete agreements on the basis that their widening use in recent years raises concerns about their negative impact on both workers and the national economy.  Specifically, the letter asks the GAO to assess the following three questions:

  1. What is known about the prevalence of non-compete agreements in particular fields, including low-wage occupations?
  2. What is known about the effects of non-compete agreements on the workforce and the economy, including employment, wages and benefits, innovation, and entrepreneurship?
  3. What steps have selected states taken to limit the use of these agreements, and what is known about the effect these actions have had on employees and employers?

Continue Reading U.S. Senators Request Review of Non-Compete Agreements by the Government Accountability Office

shutterstock_331572470We’ve written a lot this summer about the Massachusetts legislature’s latest failed attempt at non-compete reform. Two other states in New England, however, are able to claim accomplishments in that regard. Specifically, Connecticut and Rhode Island each enacted statutes this summer imposing significant restrictions on the use of non-compete provisions in any agreement that establishes employment or any other form of professional relationship with physicians. While Connecticut’s simply law limits the duration and geographic scope of physician non-competes, Rhode Island completely banned such provisions in almost all agreements entered into with physicians.

Connecticut

Effective July 1, 2016, any covenants not-to-compete entered into, amended, or renewed in Connecticut can no longer restrict a physician’s competitive activities (i) for longer than one year and (ii) in a geographic region beyond 15 miles from the “primary site” where the physician practices. Primary site refers to “the office, facility or location where a majority of the revenue derived from such physician’s services is generated” or “any other office, facility or location where such physician practices and mutually agreed to by the parties and identified in the covenant not to compete.” The law also renders such provisions enforceable only if (i) the provision is made in anticipation of a partnership or ownership agreement or (ii) the employment or contractual relationship is terminated by the employer for cause.

Rhode Island

Effective July 12, 2016, it is now unlawful in Rhode Island to restrict in any way “the right to practice medicine in any geographic area for any period of time after the termination” of any partnership, employment, or professional relationship with a physician. The law also prohibits any restrictions on the right of physicians “to solicit or seek to establish a physician/patient relationship with any current patient of the employer.” It does not, however, apply in connection with the purchase and sale of a physician practice, provided the restrictive covenant is less than five years in duration.

Takeaway

Entities that employ physicians in Connecticut and Rhode Island should take note of these recent changes to the law and thoroughly review their existing physician non-compete and non-solicitation agreements. These agreements may need significant modifications to be in compliance with the new standards discussed above.

shutterstock_134112389As we have frequently reported in this blog, social media privacy issues increasingly permeate the workplace.  For example, earlier this year, Montana and Virginia joined a growing number of states in enacting laws restricting employer access to the social media accounts of applicants and employees.  With Governor Dannell Malloy’s approval of similar legislation in Connecticut on May 21, the Constitution State has now become the latest state to follow this trend.

Connecticut’s law (Public Act 15-6) becomes effective October 1, 2015 and is generally similar to social media privacy laws enacted in other states.  Under the new Connecticut law, employers may not:

  • Request or require that an employee or applicant provide such employer with a user name and password, password or any other authentication means for accessing a personal online account;
  • Request or require that an employee or applicant authenticate or access a personal online account in the presence of such employer;
  • Require that an employee or applicant invite such employer or accept an invitation from the employer to join a group affiliated with any personal online account of the employee or applicant; or
  • Fail or refuse to hire any applicant as a result of his or her refusal to (A) provide such employer with a user name and password, password or any other authentication means for accessing a personal online account, (B) authenticate or access a personal online account in the presence of such employer, or (C) invite such employer or accept an invitation from the employer to join a group affiliated with any personal online account of the applicant.
  • In addition, like social media privacy laws in other states, the new Connecticut law has an anti-retaliation provision stating that employers may not “discharge, discipline, discriminate against, retaliate against or otherwise penalize any employee who (A) refuses to provide such employer with a user name and password, password or any other authentication means for accessing his or her personal online account, (B) refuses to authenticate or access a personal online account in the presence of such employer, (C) refuses to invite such employer or accept an invitation from the employer to join a group affiliated with any personal online account of the employee, or (D) files, or causes to be filed, any complaint, whether verbally or in writing, with a public or private body or court concerning such employer’s violation of [the law].”
  • The new law authorizes aggrieved employees and applicants to file complaints with the Connecticut Labor Commissioner, who is required to conduct an investigation and may hold an evidentiary hearing.  Remedies and penalties for violation of the statute include recovery of attorneys’ fees and costs by the aggrieved employee or applicant, back pay, rehiring or reinstatement, reestablishment of employee benefits, and civil penalties.
  • Despite the somewhat onerous penalties that employers can face for violations of the statute, the new law does contain some important exceptions.  Under the statute, employers are not prevented from:
  • Conducting an investigation for the purpose of ensuring compliance with applicable state or federal laws, regulatory requirements or prohibitions against work-related employee misconduct based on the receipt of specific information about activity on an employee or applicant’s personal online account,
  • Conducting an investigation based on the receipt of specific information about an employee or applicant’s unauthorized transfer of the employer’s proprietary information, confidential information or financial data to or from a personal online account operated by an employee, applicant or other source;
  • Monitoring, reviewing, accessing or blocking electronic data stored on an electronic communications device paid for, in whole or in part, by an employer, or traveling through or stored on an employer’s network, in compliance with state and federal law; or
  • Complying with the requirements of state or federal statutes, rules or regulations, case law or rules of self-regulatory organizations.

As other states join the growing chorus of states enacting social media privacy laws, we will continue to report of the latest developments.  In the meantime, employers should review their policies and procedures to ensure that they are up-to-date with the latest legislative enactments.

By Robert Milligan and Joshua Salinas

As part of our annual tradition, we are pleased to present our discussion of the top 10 developments/headlines in trade secret, computer fraud, and non-compete law for 2013. Please join us for our complimentary webinar on March 6, 2014, at 10:00 a.m. P.S.T., where we will discuss them in greater detail. As with all of our other webinars (including the 12 installments in our 2013 Trade Secrets webinar series), this webinar will be recorded and later uploaded to our Trading Secrets blog to view at your convenience.

Last year we predicted that social media would continue to generate disputes in trade secret, computer fraud, and non-compete law, as well as in privacy law.  2013 did not disappoint with significant social media decisions involving the ownership of social media accounts and “followers” and “connections,” as well as cases addressing liability or consequences for actions taken on social media, such as updating one’s status, communicating with “restricted” connections, creating fake social media accounts, or deleting one’s account during pending litigation.

We also saw more states (e.g., Arkansas, Utah, New Mexico, California, Colorado, Nevada, Michigan, New Jersey, Oregon, and Washington) enact legislation to protect employees’ “personal” social media accounts and we expect more states to follow.

The circuit split regarding the interpretation of what is unlawful access under the Computer Fraud and Abuse Act (“CFAA”) remains unresolved and another case will need to make its way up to the Supreme Court or legislation passed to clarify its scope as federal courts continue to reach differing results concerning whether employees can be held liable under for violating computer use or access policies.

There have also been several legislative efforts to modify trade secret, computer fraud, or non-compete law in various jurisdictions.  Texas adopted a version of the Uniform Trade Secrets Act, leaving Massachusetts and New York as the lone holdouts. Oklahoma passed legislation expressly permitting employee non-solicit agreements. Massachusetts, Michigan, Illinois, New Jersey, Maryland, Minnesota, and Connecticut considered bills that would provide certain limitations on non-compete agreements but they were not adopted.

We expect more legislative activity in 2014, particularly regarding privacy, the scope of the CFAA, and trade secret legislation to curb foreign trade secret theft and cyber-attacks.

Finally, while the Snowden kerfuffle and NSA snooping captured the headlines in 2013, government agencies remained active, including some high profile prosecutions under the Economic Espionage Act, the release of the Obama Administration’s Strategy on Mitigating the Theft of U.S. Trade Secrets,  and the National Labor Relations Board’s continued scrutiny of employers’ social media policies. We expect more government activity in this space in 2014.

Here is our listing of top developments/headlines in trade secret, computer fraud, and non-compete law for 2013 in no particular order:

1)         Dust Off Those Agreements . . . Significant New Non-Compete Cases Keep Employers On Their Toes

Employers were kept on their toes with some significant non-compete decisions which forced some employers to update their agreements and onboarding/exiting practices. First, in Fifield v. Premier Dealer Services, an Illinois appellate court found that less than two years employment is inadequate consideration to enforce a non-compete against an at-will employee where no other consideration was given for the non-compete. Second, in Dawson v. Ameritox, an Alabama federal court found that a non-compete executed prior to employment was unenforceable. Next, in Corporate Tech. v. Hartnett, a Massachusetts federal court held that initiating contact was not necessary for finding solicitation in breach of a customer non-solicitation agreement. Lastly, in Assurance Data v. Malyevac, the Virginia Supreme Court found that a demurrer (i.e., a pleading challenge) should not be used to determine the enforceability of non-compete provisions but rather evidence should be introduced before making such a determination.

2)         Continued Split of Authority On the Computer Fraud and Abuse Act and Efforts to Reform CFAA and Enhance Federal Trade Secret and Cybersecurity Law

Courts in Massachusetts, Minnesota, and New York joined the Ninth Circuit’s narrow reading of the CFAA and limited its applicability to pure hacking scenarios rather violations of employer computer usage or access policies. Additionally, in 2013, Representative Zoe Lofgren introduced Aaron’s Law, named after the political hackvist Aaron Swartz, to reform of the Computer Fraud and Abuse Act. Her proposed legislation would limit the CFAA to pure hacking scenarios and exclude violations of computer usage policies and internet terms of service from its scope. Lofgren also introduced legislation which would create a federal civil cause of action in federal court for trade secret misappropriation. Other legislation to prevent intellectual property theft was also introduced including the Deter Cyber Theft Act, which aims to block products that contain intellectual property stolen from U.S. companies by foreign countries from being sold in the United States. The Cyber Economic Espionage Accountability Act was also introduced and allows U.S. authorities to “punish criminals backed by China, Russia or other foreign governments for cyberspying and theft.” We expect Congress to consider similar legislation in 2014.

3)         Texas Adopts Uniform Trade Secrets Act

Texas joined forty-seven other states in adopting some version of the Uniform Trade Secrets Act. Until recently, Texas common law governed misappropriation of trade secrets lawsuits in Texas. The new changes under the Texas UTSA (which we discuss in more detail here) provide protection for customer lists, the ability to recover attorneys’ fees, a presumption in favor of granting protective orders to preserve the secrecy of trade secrets during pending litigation, and that information obtained by reverse engineering does not meet the definition of a trade secret.  Legislation has been introduced in Massachusetts to adopt the Act but has yet to pass. For additional information on recent trade secret and non-compete legislative updates, check out our webinar “Trade Secrets and Non-Compete Legislative Update.”

4)         High Profile Prosecutions and Trials under Computer Fraud and Abuse Act and Economic Espionage Act

2013 saw several high profile prosecutions and trials under the CFAA and Economic Espionage Act. Bradley Manning, who allegedly leaked confidential government documents, to WikiLeaks, and Andrew ‘Weev’ Auernheimer, who allegedly hacked AT&T’s servers, were both convicted under the CFAA. Executive recruiter David Nosal was convicted by a San Francisco jury of violating federal trade secret laws and the CFAA and sentenced to one year and a day in federal prison.  In U.S v. Jin, the Seventh Circuit upheld the conviction of a Chicago woman sentenced to four years in prison for stealing trade secrets of her employer before boarding a plane for China. For additional information on criminal liability for trade secret misappropriation, check out our webinar “The Stakes Just Got Higher: Criminal Prosecution of Trade Secret Misappropriation.”

5)         More Social Media Privacy Legislation

Arkansas, Utah, New Mexico, Colorado, Nevada, Michigan, New Jersey, Oregon, and Washington all passed legislation social media privacy legislation in 2013 that prohibited employers from asking or insisting that their employees provide access to their personal social networking accounts. California extended its current social media privacy law to specify that it encompassed public employers.  We expect more states to enact social media privacy legislation in 2014.

6)         Continued Uncertainty on the Scope of Trade Secret Preemption

Courts have continued struggled with the scope and timing of applying preemption in trade secret cases but there is a growing movement to displace common law tort claims for the theft of information. Such claims are typically tortious interference with contract, conversion, unfair competition, and breach of fiduciary duty. In essence, plaintiffs may only be left with breach of contract and a trade secret claim for the theft of information if a jurisdiction has adopted a broad preemption perspective. Courts in western states such as Arizona, Hawaii, Nevada, Utah, and Washington have preempted “confidential information” theft claims under their respective trade secret preemption statutes.

In K.F. Jacobsen v. Gaylor, an Oregon federal court, however, found that a conversion claim for theft of confidential information was not preempted. In Triage Consulting Group v. IMA, a Pennsylvania federal court permitted the pleading of preempted claims in the alternative. Additionally, in Angelica Textile Svcs. v. Park, a California Court of Appeal found that there was no preemption of claims for breach of contract, unfair competition, conversion, or tortious interference because the claims were based on facts distinct from the trade secret claim and the conversion claim asserted the theft of tangible documents. In contrast, in Anheuser-Busch v. Clark, a California federal court found that a return of personal property claim based on the taking of “confidential, proprietary, and/or trade secret information” was preempted because there was no other basis beside trade secrets law for a property right in the taken information. For additional information on the practical impact of preemption on protecting trade secrets and litigating trade secret cases, check out our webinar “How and Why California is Different When it Comes to Trade Secrets and Non-Competes.”

7)         Growing Challenge of Protecting of Information in the Cloud with Increasing Prevalence of BYOD and Online Storage

While the benefits of cloud computing are well documented, the growth of third party online data storage has facilitated the ability for rogue employees to take valuable trade secrets and other proprietary company electronic files, in the matter of minutes,  if not seconds. The increasing use of mobile devices and cloud technologies by companies both large and small is likely to result in more mobile devices and online storage being relevant in litigation. A recent article in The Recorder entitled “Trade Secrets Spat Center on Cloud,” observed that the existence of cloud computing services within the workplace makes it “harder for companies to distinguish true data breaches from false alarms.”

An insightful Symantec/Ponemon study on employees’ beliefs about IP and data theft was released in 2013. It surveyed 3,317 employees in 6 countries (U.S., U.K., France, Brazil, China, South Korea). According to the survey, 1 in 3 employees move work files to file sharing apps (e.g. Drop Box). Half of employees who left/lost their jobs kept confidential information 40% plan to use confidential information at new job. The top reasons employees believe data theft acceptable: (1) does not harm the company does not strictly enforce its policies; (2) information is not secured and generally available; or (3) employee would not receive any economic gain.  The results of this study serve as a reminder that employers must be vigilant to ensure that they have robust agreements and policies with their employees as well as other sound trade secret protections, including employee training and IT security, to protect their valuable trade secrets and company data before they are compromised and stolen. Employers should implement policies and agreements to restrict or clarify the use of cloud computing services for storing and sharing company data by employees. Some employers may prefer to simply block all access to such cloud computing services and document the same in their policies and agreements. For a further discussion about steps and responses companies can take when their confidential information and/or trade secrets appear, or are threatened to appear, on the Internet, check out our webinar “My Company’s Confidential Information is Posted on the Internet! What Can I Do?

8)         Continued Significance of Choice of Law and Forum Selection Provisions In Non-Compete and Trade Secret Disputes

The U.S. Supreme Court’s recent decision in Atlantic Marine v. U.S.D.C. for the W.D. of Texas appears to strengthen the enforceability of forum selection clauses as it held that courts should ordinarily transfer cases pursuant to applicable and enforceable forum selection clauses in all but the most extraordinary circumstances. While Atlantic Marine did not concern restrictive covenant agreements or the employer-employee context, it may nonetheless make it more difficult for current and/or former employees to circumvent the forum selection clauses contained in their non-compete or trade secret protection agreements. Many federal courts continue to enforce out-of-state forum selection clauses in non-compete disputes (see AJZN v. Yu and Meras Eng’r’g v. CH2O), while some courts have disregarded forum selection clauses in such disputes “in the interests of justice.”  The Federal Circuit in Convolve and MIT v. Compaq and Seagate, held that information at issue lost its trade secret protection when the trade secret holder disclosed the information because it failed to comply with the confidential marking requirement set forth in a non-disclosure agreement. Accordingly, trade secret holders should be careful what their non-disclosure agreements say about trade secret protection otherwise they may lose such protection if they fail to follow such agreements.

9)         Social Media Continues to Change Traditional Legal Definitions and Analyses  

Social media continues to change the way we define various activities in employment, litigation, and our everyday lives. A Pennsylvania federal district court in the closely watched Eagle v. Morgan case found that a former employee was able to successfully prove her causes of action against her former employer for the theft of her LinkedIn account, but she was unable to prove damages with reasonable certainty. Recent cases in Massachusetts and Oklahoma held that social media posts, updates and communications with former customers did not violate their non-solicitation restrictive covenants with their former employer. In the litigation context, a  New Jersey federal court issued sanctions against a litigant for deleting his Facebook profile, while a New York federal court allowed the FTC to effectuate service of process on foreign defendants through Facebook. The Fourth Circuit held that “liking” something on Facebook is “a form of free speech protected by the First Amendment.” Federal district courts in Nevada and New Jersey illustrated the growing trend of courts finding that individuals may lack a reasonable expectation of privacy in social media posts. For further discussion on the relationship between social media and trade secrets, check out our webinar “Employee Privacy and Social Networking: Can Your Trade Secret Survive?

10)       ITC Remains Attractive Forum to Address Trade Secret Theft

The Federal Circuit caught the attention of the ITC and trade secret litigators alike when it ruled in TianRui Group Co. v. ITC that the ITC can exercise its jurisdiction over acts of misappropriation occurring entirely in China. Since then, victims of trade secret theft by foreign entities are increasingly seeking relief from the ITC (e.g. In the Matter of Certain Rubber Resins and Processes for Manufacturing Same (Inv. No. 337-TA-849)). For valuable insight on protecting trade secrets and confidential information in China and other Asian countries, including the effective use of non-compete and non-disclosure agreements, please check out our recent webinar titled, “Trade Secret and Non-Compete Considerations in Asia.“

We thank everyone who followed us this year and we really appreciate all of your support. We also thank everyone who helped us make the ABA’s Top 100 Law Blogs list. We will continue to provide up-to-the-minute information on the latest legal trends and cases across the country, as well as important thought leadership and resource links and materials.

Don’t forget to register to receive a copy of our Annual Blog Year in Review.

We previously reported on H.B. 6658, which was introduced earlier this year in the Connecticut House of Representatives. On the last day of the legislative session, the Connecticut legislature enacted a substantially watered-down version of the bill as Public Act No. 13-309, the full text of which can be found here. In yet another twist, however, last Friday Governor Dannel P. Malloy vetoed the legislation, returning the bill to the legislature with a letter noting his concerns about a lack of clarity in the final version of the bill enacted by the legislature.

The final bill, which would have gone into effect on October 1, 2013 if signed by Governor Malloy, provides that, in certain circumstances, a “noncompete agreement” (which is not defined in the bill) entered into, renewed, or extended on or after October 1, 2013 between an employer and employee is void, unless, “before entering into the agreement, the employer provides the employee with a written copy of the agreement and a reasonable period of time, of not less than seven calendar days, to consider the merits of entering into the agreement.” Employees can waive the right provided under the bill if the waiver is reduced to a separate writing, sets forth the right being waived and is signed by the employee prior to entering into the agreement.

Because the bill represents the first time that Connecticut has enacted a non-compete statute of general applicability to all employees in the state (existing statutes apply only to security guards and broadcasters), the bill would have represented a significant development in Connecticut noncompete law if signed into law. Nevertheless, the final bill contains a significant limitation: unlike earlier drafts of the legislation, the bill only applies when:

(1) “an employer is acquired by, or merged with, another employer,” and

(2) “as a result of such merger or acquisition an employee of the employer is presented with a noncompete agreement as a condition of continued employment with the employer.”

The final version of the bill also contains three other noteworthy departures from the draft bill.

First, a prior draft of the bill would have provided employees with a statutory basis for filing suit against employers who act in violation of the law (including recovery of damages and attorney’s fees). The final bill lacks this provision.

Second, a prior draft of the bill would have required employers to provide employees with “at least 10 days, and more if reasonable, to consider the merits of entering into the agreement.” The final bill dropped the number from 10 to 7 days and omitted the vague “more if reasonable” language.

Third, a prior draft of the bill provided that the bill applies to “an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line or business after termination of employment.” In contrast, the final version of the bill refers only to “a noncompete agreement” without further definition. It is unclear whether the legislature intended the language in the final version to be shorthand for true noncompete agreements (i.e., agreements that “expressly prohibits an employee from engaging in employment or a line or business after termination of employment”) or whether they intended the term “noncompete agreement” to include other post-termination restrictive covenants, such as covenants not to solicit customers and employees.

In his letter returning the bill to the legislature, Governor Malloy observed that, in light of uncertainty in the final bill, “it would be better for both employers and employees to receive greater clarity from the General Assembly on this issue next session.” We will continue to monitor developments on legislation in Connecticut if and when comparable legislation is introduced in the legislature at the next legislative session.

*Please note that there was confusion within several media outlets and blogs, including Trading Secrets, as to whether the Governor had in fact signed this legislation. We apologize for any confusion caused by those reports.

We previously reported on H.B. 6658, which was introduced earlier this year in the Connecticut House of Representatives.  The Connecticut Legislature passed the legislation on the last day of the legislative session.  The final text of the Act, which was enacted as Public Act No. 13-309 and will go into effect on October 1, 2013 assuming the Act is signed by the governor, can be found here.

The Act provides that, in certain circumstances specified in the Act, a “noncompete agreement” (which is not defined in the Act) entered into, renewed, or extended on or after October 1, 2013 between an employer and employee is void, unless, “before entering into the agreement, the employer provides the employee with a written copy of the agreement and a reasonable period of time, of not less than seven calendar days, to consider the merits of entering into the agreement.”  Employees can waive the right provided under the Act if the waiver is reduced to a separate writing, sets forth the right being waived and is signed by the employee prior to entering into the agreement.

Because the Act represents the first time that Connecticut has enacted a non-compete statute of general applicability to all employees in the state (existing statutes apply only to security guards and broadcasters), the Act represents a significant development in Connecticut noncompete law.  Nevertheless, the Act contains a significant limitation: unlike earlier drafts of the legislation, the Act only applies when:

(1)        “an employer is acquired by, or merged with, another employer,” and

(2)        “as a result of such merger or acquisition an employee of the employer is presented with a noncompete agreement as a condition of continued employment with the employer.”

The final version of the Act also contains three other noteworthy departures from the draft bill.

First, a prior draft of the bill would have provided employees with a statutory basis for filing suit against employers who act in violation of the law (including recovery of damages and attorney’s fees).  The Act lacks this provision.

Second, a prior draft of the bill would have required employers to provide employees with “at least 10 days, and more if reasonable, to consider the merits of entering into the agreement.”  The final bill dropped the number from 10 to 7 days and omitted the vague “more if reasonable” language.

Third, a prior draft of the bill provided that the bill applies to “an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line or business after termination of employment.”  In contrast, the final version of the Act refers only to “a noncompete agreement” without further definition.  It is unclear whether the legislature intended the language in the final version to be shorthand for true noncompete agreements (i.e., agreements that “expressly prohibits an employee from engaging in employment or a line or business after termination of employment”) or whether they intended the term “noncompete agreement” to include other post-termination restrictive covenants, such as covenants not to solicit customers and employees.  However, given that the final version of the Act limited the scope of the original bill in most respects, it seems unlikely that the legislature intended to expand the scope of the Act to include restrictive covenants other than true noncompete covenants.

We will continue to monitor developments on this new law. In the meantime, any employers with operations in Connecticut should include compliance with this statute in any due diligence checklist for mergers or other acquisitions. For more information on this legislation or other non-compete or trade secret legislation, please see our recent webinar and podcast regarding the topic.

Connecticut has recently proposed non-compete legislation which could dramatically impact restrictions on employee mobility. 

The bill, known as “Employer Use of Noncompete Agreements,” is House Bill 6658.  The bill recently passed in the Judiciary Committee, and is currently pending before Connecticut’s House of Representatives.

As it is written, the bill is intended to apply to all Connecticut employers.  The bill will regulate all non-compete agreements in effect after October 1, 2013, and will be the first of its kind in Connecticut.  As of now, requirements for non-compete agreements are based on case law.

 The bill permits the use of non-compete agreements if: “(1) the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business, and (2) prior to entering into the agreement or covenant, the employer provides the employee a reasonable period of time, of not less than ten business days, to seek legal advice relating to the terms of the agreement or covenant.” The notice provision is similiar to the notice requirements in Oregon and New Hampshire.

 Unlike the current requirements for non-compete agreements, which can be found in the state’s case law, this new legislation would provide employees with a statutory basis for filing suit against employers who act in violation of the law. The new law would allow for the recovery of both damages and attorney’s fees as follows:  “any person who is aggrieved by a violation of this section may bring a civil action in the Superior Court to recover damages, together with court costs and reasonable attorney’s fees. To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement or covenant to render it reasonable in light of the circumstances in which it was entered into and specifically enforce the agreement or covenant as limited.” The proposed legislation permits equitable modification by the court of an overbroad agreement.

Employers should take note of this proposed legislation, as it could have significant implications if it passes.  Such a statute may encourage litigation, as employees who are at all successful  in challenging their agreement may stand to recover a significant sum.   

The Connecticut Business and Industry Association has pointed out that the legislation may be overly broad.  The definition of employee is broad enough that it could potentially include independent contractors.  Furthermore, even if an agreement otherwise complies with the laws, an employee could have a cause of action if an employer fails to provide a ten day waiting period.

As the Connecticut Employment Law blog explains, the bill could prove problematic for the courts, as it is not consistent with the case law:  courts “use a variety of factors to evaluate the reasonableness of a restrictive covenant including: (1) the length of time the restriction operates, (2) the geographical area covered, (3) the fairness of the protection afforded the employer, (4) the extent of the restraint on the employee’s opportunity to pursue his occupation, and (5) the extent of interference with the public interest. “  Here, there is no telling how the courts would interpret the reasonableness standard in the legislation, and whether it would be consistent with current case law. Additionally, as Ken Vanko points out on his non-compete blog, the proposed legislation likely does not apply to confidentiality agreements and it is unclear whether it applies non-solicitation agreements.

Whether the Connecticut bill will pass remains to be seen, as we expect that the Connecticut business community will weigh in. We will continue to keep you apprised of future developments concerning the bill.

The Second Circuit Court of Appeals has reversed a Connecticut federal court’s order dismissing for lack of personal jurisdiction a Connecticut corporation’s complaint for misappropriation of trade secrets by a Canadian employee of the plaintiff’s Canadian subsidiary. The complaint alleged her knowledge that her employer’s emails were stored on its parent corporation’s servers in Waterbury, Connecticut. Therefore, the claim that she purposefully engaged in activities in Connecticut, by downloading confidential emails from her employer’s computer to her personal computer, was adequately pleaded. MacDermid, Inc. v. Deiter, No. 11-5388-cv (2nd Cir., Dec. 26, 2012), rev’g No. 3:11-CV-0855-WWE (D. Conn., Dec. 1, 2011).

Connecticut’s long-arm statute provides, in relevant part, that a non-resident is subject to the state’s jurisdiction for lawsuits alleging misuse of “a computer, as defined, . . . located within the state.” The statutory definition of the word “computer” includes “an electronic . . . device . . . that, pursuant to . . . human instruction . . . can automatically perform computer operations with . . . computer data and can communicate the results to another computer or to a person [or is a] connected or directly related device . . . that enables the computer to store, retrieve or communicate . . . computer data . . . to or from a person, another computer or another device.” According to the Second Circuit, “a computer server meets the Connecticut long-arm statute’s definition of computer.”

In support of her successful motion to dismiss in the district court, the defendant noted that she did not work in the U.S. and that she had no reason to expect that a suit against her would be heard anywhere other than in Canada. The trial court’s Memorandum of Decision observed that she was not alleged to have engaged in a persistent course of misconduct or to have derived any revenue from the supposed misappropriation. That court stressed that the “defendant’s tortious conduct occurred, if at all, when defendant transferred plaintiff’s proprietary information onto her home computer from her work computer, a transaction that occurred exclusively in Canada.”

According to the Court of Appeals, however, “It is not material that [the defendant] was outside of Connecticut when she accessed the Waterbury servers. The statute requires only that the computer . . ., not the user, be located in Connecticut.” While recognizing that many internet users probably do not know the location of servers where emails are stored, this defendant allegedly was aware that the servers were in Connecticut, and at the motion to dismiss stage, well pleaded factual allegations are assumed to be true. In light of the interest of a company with its principal place of business in Connecticut in obtaining redress for alleged wrongs and the public interest of the state in which the company is based, and because “efficiency and social policies against computer-based theft are generally served by adjudication in the state from which computer files have been misappropriated,” the Connecticut federal court could properly exercise jurisdiction.

The decision in this case constitutes a warning to all persons misappropriating confidential emails. No matter where in the world the defendant downloads the emails, he or she may be sued in Connecticut — or in any other state with a similar statute — for trade secrets misappropriation where the emails are stored on servers in the forum state, particularly if the plaintiff does business there and the defendant is alleged to have known the location of the servers. Check out Kenneth Vanko’s blog for a quick analysis of the case.

See also our prior post where a California federal district court examined the issue of personal jurisdiction in an international trade secret misappropriation and breach of contract dispute between an American company and a European distributor based out of Ireland.

A Connecticut federal court recently issued a significant decision concerning the rights of a buyer of a business to enforce non-competition agreements against employees who previously worked for the seller under New York law.

In 2003, Milso and each of its employees signed an employment agreement expressly governed by New York law. The agreement contained confidentiality, non-solicitation and non-competition covenants enforceable for 18 months after termination of employment, but assignability was not mentioned. In 2005, the employer, a casket company, sold its assets, expressly assigning all employment agreements. At the closing of the purchase and sale transaction, the seller terminated its employees, and then the purchaser re-hired them on substantially similar terms. The purchaser asked its employees to acknowledge that they remained subject to the covenants. Three years later, two of the purchaser’s employees, who had worked for the seller but never executed the acknowledgement, resigned and began working for a competitor. The purchaser sued them in a Connecticut federal court for breach of contract, misappropriation of trade secrets, and similar causes of action. They responded by filing a declaratory judgment counterclaim asserting that, for purposes of the employment agreement covenants, they were terminated at the closing of the assets purchase and sale transaction which was more than 18 months before they began competing.

On cross motions for summary judgment, the court held that if the signatories to the employment agreements intended for the agreements to be assignable, the covenants were enforceable against employees who accepted comparable continuous employment by the purchaser. Here, the issue of the parties’ intent with regard to assignability requires a trial. Milso Indus. Co. v. Nazzaro, Case No. 3:08CV1026 (AWT) (D. Conn., Aug. 30, 2012).

The purchaser also accused the departed employees of misappropriating trade secrets, namely, a customer list and a “confidential business plan.” The court ruled that those items could qualify as trade secrets if they have “independent economic value” and reasonable efforts were undertaken to maintain their confidentiality. A trial is necessary to determine whether the list and plan here qualified as trade secrets.

The Connecticut federal court’s decision is particularly instructive with regard to the right of an assignee of an employment agreement, which contains no provision regarding assignability, to enforce covenants in the agreement. The court concluded that the dispositive question is: Did the parties to the agreement intend for it to be assignable. The assignee’s burden is to prove that the signatories to the agreement — the assignor and the assignors’ employee — understood at the time the agreement was signed that it was assignable.

Companies involved in buy-sell transactions or mergers need to take special care to ensure that there are enforceable non-compete/restrictive covenant agreements in place with employees who remain with the buyer after the transaction is complete –that may include relying upon existing non-compete agreements between the seller and the employees or new agreements between the buyer and the employees depending upon the law in the applicable jurisdiction. John Marsh’s Trade Secret Litigator blog has an excellent summary of two recent cases from Ohio and Florida concerning the assignment of non-competes agreements. Also, please consider watching our webinar on Key Considerations Concerning Trade Secrets and Non-Competes in Business Transactions for more information on this important topic.

A recent federal decision from Connecticut confirms the notion that information knowingly posted on the Internet by its owner cannot constitute a protectable trade secret.  

On April 1, 2011, April Fools’ Day, a human relations consulting firm SharedXpertise allegedly disseminated by email and on its website a false statement that it had acquired its competitor LRP Publications. Kutik, a consultant for LRP, was offended. He promptly sued SharedXpertise in the Connecticut federal court and alleged unfair competition, violation of the Connecticut Unfair Trade Practices Act, and other causes of action. He claimed that as a result of the press release, potential vendors and attendees signed up for SharedXpertise’s May 2011 conference instead of LRP’s competing event scheduled for October 2011. 

Kutik served interrogatories and a request for production which would have had the effect of requiring SharedXpertise to identify the sponsors and providers for the May event. SharedXpertise objected and sought a protective order permitting the information to be produced for “attorneys eyes only” because, supposedly, it constituted confidential trade secrets. According to SharedXpertise, the only legitimate use of the information was to facilitate a comparison of the names on the list with the names of persons and entities expected to attend, but not attending, the October conference, and the attorneys could make this comparison. Kutek disputed the claim that SharedXpertise closely guarded its customer list, pointing out that the requested information was prominently displayed on SharedXpertise’s website, and an attendance list was handed out at the conference. Further, he said that his own analysis of the information, based on 22 years in the industry, would be more efficient than his counsel’s review alone. 

Magistrate Judge Margolis issued a compromise ruling. She ordered SharedXpertise to produce without an “attorneys’ eyes only” restriction information “readily available on defendant’s website,” but she permitted SharedXpertise to limit to Kutek’s attorneys access to names “not openly identified through resort to defendant’s website”   Kutik v. SharedXpertise Media, LLC, 2012 WL 1435288 (D.Conn. 2012).  The court’s ruling confirms that although an entire list of customers may not constitute a trade secret, a portion or sub-set of the list that is not publicly available may qualify for trade secret protection.