Congress Tries Again – The Defend Trade Secrets Act

Jackson Lewis attorneys Peter R. Bulmer, A. Robert Fischer, Michael S. Kantor, and David E. Renner have prepared a detailed update on the firm’s website on the status of a bill in Congress which would create a federal trade secrets law, known as the Defend Trade Secrets Act.  Stay tuned for further developments!

 

 

California Court of Appeal Holds Employee’s Agreement to Reimburse Training Costs in Event of Resignation Does Not Offend Public Policy

A California court recently upheld an employer’s right to condition free training on continued employmentin the matter of USS-POSCO Industries v. Case, No. A140457 (Jan. 26, 2016). The defendant/appellant in the litigation, USS POSCO Industries (“UPI”) had originally hired Case as an entry-level Laborer and Side Trim Operator. UPI faced a shortage of skilled Maintenance Technical Electrical (“MTE”) workers. To address this shortage, via a memorandum of understanding with the pertinent union, UPI established a program to train a number of current employees to qualify them as MTEs. The program required 135 weeks of instruction, 90 weeks of on the job training and 45 weeks of classroom work. UPI estimated it cost over $46,000 per employee. During the program, UPI also paid the participant’s regular wages. If a participant successfully completed the program and then passed UPI’s MTE test, he would be assigned to an MTE vacancy. Participation was voluntary, but each participant had to agree that, if he voluntarily left UPI’s employment within 30 months after completion, he would reimburse UPI $30,000 of the expense of his training, less $1,000 per month of subsequent service at UPI.

Case voluntarily enrolled and completed the program. Two months later, he resigned and went to work for another employer. When he failed to pay his $28,000 reimbursement obligation, UPI sued. The trial court ruled in favor of UPI, and the court of appeal affirmed. On appeal, Case contended the reimbursement agreement was an invalid restraint on employment under Bus. and Prof. Code section 16600, which provides in relevant part, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The court had little difficulty rejecting his argument, however.

The court reasoned that Case’s participation in the program was voluntary, the money he agreed to pay was for advanced educational costs, and he was not restrained from leaving UPI and working anywhere else, which he in fact did. As the court explained, “repayment of the fronted costs of a voluntarily undertaken educational program, the benefits of which transcend any specific employment and are readily transportable, is not a restraint on employment.” The court distinguished two precedents: one voiding a claw back of an employee’s pension rights if he chose to compete, the other voiding a liquidated damages provision that amounted to a price for choosing to compete.

The takeaway: despite California’s well-known public policy against non-compete agreements, employers may require an employee to repay the costs of voluntary educational benefits should the employee choose to leave within a reasonably defined time period, and compete, after receiving the benefit.

New Proposed Rule Would Restrict Confidentiality Agreements for Government Contractors

The Jackson Lewis Affirmative Action Compliance & OFCCP Defense Practice Group has written about an important new proposal which would bar certain employers from using confidentiality agreements that restrict employees or subcontractors from reporting waste, fraud or abuse to the government.  This is the latest in a series of new and proposed requirements imposed on government contactors and, once enacted, would require covered employers to review and modify existing contracts for compliance.

 

Insider Threat: Employee Mobility and Trade Secrets

Cliff Atlas, a principal with Jackson Lewis, will be participating in a webinar on January 20, 2016 on the topic of “Insider Threat: Employee Mobility and Trade Secrets” on the IP Chat Channel sponsored by the Intellectual Property Owners Association.  www.ipo.org/IPChatChannel. The webinar is open to all. The registration fee is $130, with academic and government discounts available.

UPCOMING WEBINAR Design Patent Damages: The Law As It Is Today Thurs Jan 28 — EARN CLE

and gain insight

by viewing earlier webinars

 

They are available at

www.ipo.org/IPChatChannel CLE available in many states.

FRAND Damages: Comparing the Four Leading Cases, Including CSIRO ITC and the Federal Circuit: Clearcorrect and Suprema

CBM Review: Taking Stock of the Case Law w/Judge Michael Tierney USPTO’s After Final Consideration Program: How to Reach Allowance New Rules of Federal Civil Procedure: Best Practices in  Patent Litigation Patent Prosecution  After Akamai 

Definite Change:

Nautilus Gains Some Traction

Advance Conflict Waivers:

How to Avoid

Unpleasant Surprises

 

New Litigation Strategies

After Akamai:

Fact Pattern Hypotheticals in Joint Infringement 

 

Amgen v. Sandoz: 

What Now?

3D Printing for Patent Lawyers: Repair, Reconstruction, Exhaustion

 

 

Int’l Patent Prosecution: Best Practices Inducement and Willfulness after Commil 

Privity  and Real-Part-in Interest/ Estoppel at the PTAB       

 

Patent Prosecution with an Eye to the PTAB Antitrust and IP in China Design-Arounds: Strategy for the ITC and District Courts Safeguarding GUIs: Best Practices Using Multiple Layers of IP

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A New Era in Global Patent Prosecution? 

Ex Parte Reexamination: New Tactics, Old Tool Negotiating NDAs Between Suppliers and Customers    Export Controls: Understanding and Managing the Risks Privilege: Thorny Issues involving Foreign Lawyers and Patent Agents

Consumer Surveys 

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For a list of additional archived webinars, 

please visit

www.ipo.org/IPChatChannel 

IPO IP Chat Channel WebinarInsider Threat: Employee Mobility and Trade SecretsWednesday January 20

  2 PM ET  

Litigation against former insiders accounts for a significant portion of all trade secret cases. Yet these disputes are difficult to win. Our panel will discuss best practices for safeguarding trade secret and other confidential corporate information from appropriation by employees, as well as contractors, and consultants.

War stories from a litigator will highlight how not meeting this high bar will cause a plaintiff’s case to fail. An employment law specialist will discuss emerging issues in non-compete agreements, such as the need to give current employees a bonus or profit-sharing consideration in exchange for signing a tougher non-compete. In-house counsel of a global technology company will give advice for surviving in a world without non-competes. Finally, the panel will consider the flip side of the issue: best practices for avoiding a lawsuit when hiring an employee from a competitor.

 

PANELISTS 

 

Clifford Atlas is a Principal in the New York office of Jackson Lewis, which specializes in employment law. He is the co-leader of its Non-Competes and Protection Against Unfair Competition Practice Group. He develops and drafts employment contracts and restrictive covenant agreements, and prosecutes and defends actions involving breach of non-competition and non-solicitation agreements and misappropriation of confidential information. Buckmaster de Wolf is General Counsel of GE Global Research, based in Niskayuna, NY. He is responsible for the trade secret policies and procedures for more than 3,500 GE scientists who work in seven facilities worldwide in fields ranging from computing to metallurgy. Buck was formerly GE’s Senior Counsel Litigation & Legal Policy, focusing on IP litigation.  Prior to joining GE, he was a partner in the San Francisco office of Howrey. 

   

 

Randy Kay is a partner and litigator at Jones Day in San Diego. He

focuses his practice on trade secret and patent disputes, concentrating on representing technology, telecom, biotech, and medical device companies. He is co-editor/author of Trade Secret Litigation and Protection in California (State Bar of California, 2014).

Intellectual Property Owners Association’s      one-hour webinars on current topics in IP, hosted by Pamela Sherrid, former editor of IP Law & Business magazine  REGISTRATION FEE$130 per user per webinarAcademic and government discount available

through written request to meetings@ipo.org

 

To register, please click to

www.ipo.org/IPChatChannel

 

Continuing Legal Education Credit (CLE) is available. IPO is applying for CLE in a limited number of states. Visit www.ipo.org/IPChatChannel for current CLE information.

Four Non-Compete and Confidentiality Agreement Issues to Watch in 2016

2016Jackson Lewis has prepared an end-of-the-year review of four non-compete and confidentiality issues to watch in 2016 on its website.

Clifford R. Atlas, co-chair of the firm’s non-compete and unfair competition practice group, and attorney Puja Gupta from the firm’s Baltimore office, identify four developments to keep an eye on next year:

1. Enforceability of choice of law and choice of forum clauses may be questioned;

2. Adequacy of consideration in exchange for non-compete agreements with current employees is under increasing scrutiny;

3. SEC enforcement activity; and

4. The circuit split on the scope of the Computer Fraud and Abuse Act.

Click on the link above to see their analysis!

Second Circuit Adopts Narrow Construction of Federal Computer Fraud Statute, Joins Circuit Split

computerClifford R. Atlas and Ravindra K. Shaw of Jackson Lewis’s New York office have written on the firm’s website about a recent decision from the Second Circuit Court of Appeals applying the narrow definition of “exceeds authorized access” under the Computer Fraud and Abuse Act.  The case is United States v. Valle, 2015 U.S. App. LEXIS 21028 (2d Cir. Dec. 3, 2015).

The authors note that with a growing split in the circuits on this issue, “the likelihood of U.S. Supreme Court review increases.”

Consideration Required to Bind Existing Employees to Noncompetes, Pennsylvania Supreme Court Holds

The Pennsylvania Supreme Court has ruled that a non-compete signed during the course of employment, without additional consideration, is not enforceable even though the agreement stated that the parties “intend to be legally bound.” Socko v. Mid-Atlantic Systems of CPA, Inc.

Douglas G. Smith, Melissa L. Evans and David E. Renner from our Pittsburgh office discuss the case on the Jackson Lewis website.

Illinois Appellate Court Finds Non-Compete Restrictions Over-Reaching and Affirms Court Decision Not to Blue Pencil

Illinois courtsA recent decision from an Illinois Appellate Court suggests that employers with non-compete agreements “built to scare” may end up with an unenforceable contact and even the loss of confidential information under Illinois law. AssuredPartners, Inc. v. Schmitt (October 27, 2015 1st Dist.) Illinois Courts continue to carefully scrutinize contracts containing post-employment restrictions over concerns about over-reaching, especially restrictions that are seen as overbroad in geographic reach as well as attempts to keep an ex-employee completely out of an industry on a nationwide basis. In Assured Partners, the named plaintiff sought to prevent an insurance executive from working anywhere in the U.S. within the particular segment of the insurance industry he had worked all his life.

Defending the broad geographic scope of the agreement, the former employer apparently pointed out that the executive could work in the U.K., but neither the appellate court nor the trial court judge saw this as a meaningful option. Both courts also held that the restriction on any work involving professional liability insurance was overbroad considering the executive only worked in the area of legal liability insurance. And, not only did the Appellate Court find the non-compete clause overbroad and thus unenforceable, it went on to find that the non-solicitation clause was also overbroad because it attempted to prevent solicitation of the former employer’s prospects who were not yet customers, many of whom the executive had not himself had any contact with. Considering that the executive walked off with lists of contract expiration dates, as he did in this case, the court’s conclusion that even the confidentiality clause was overbroad because it would ban the former employee from using essentially anything he learned or observed while he was employed was especially notable.

The trial court and Appellate Court also declined to allow the employer to pull the cord on its reserve chute – application of a blue-pencil clause in the executive’s agreement. The trial court held that the agreement was “not a candidate for judicial reformation.” The Appellate Court agreed, stating, “[w]e decline to rescue a draftor from the risks of crafting a restrictive covenant that is patently overbroad” and noting that blue-penciling is only appropriate where the overreach was minor and in this case the agreement over-reached in three ways. Finally, the Appellate Court went one step further and denied the former employer’s motion to amend the complaint, cutting off the employer from any remedy.

This case reminds employers that:

  1. Contracts drafted for deterrence factors may not be so scary anymore and may leave the employer with no recourse when the employee actually walks off with customers’ contract expiration dates and begins using them to start a new business. Off the shelf contracts may also be too broad and are risky for this reason.
  2. Courts, at least in Illinois, cannot be counted on to re-write overbroad contracts to help employers who the court views as having attempted to over-reach.
  3. Employers need to make sure that their post-employment restrictive covenants go only so far as to protect their current interests and no further. Illinois courts have shown a low tolerance for post-employment restrictions beyond those designed to protect losses to an employers’ specific and legitimate business interests.

Florida Appellate Court Rules Former Customers Are Not a Legitimate Business Interests

A recent case from Florida’s Fifth District Court of Appeals underlines the importance for employers to provide a sufficient legitimate business interest to justify enforcement of a non-compete agreement. Where a former employee or contractor is interfering with client relationships, the employer must be careful to point out specific prospective or existing clients when enforcing a non-compete agreement.

In Evans v. Generic Solution Engineering, LLC, 2015 Fla. App. LEXIS 16175 (Fla. 5th DCA 2015) the appellate court reversed an order granting a temporary injunction against a former independent contractor who was subject to a non-competition agreement. The employer sought to prevent its former contractor from performing services for the employer’s former clients. The court held that an employer’s relationships with former clients are not legitimate business interests sufficient to enforce a restrictive covenant. While courts have previously acknowledged the distinction between former and existing client relationships, this appears to be the first decision in which an appellate court reversed a temporary injunction enforcing a non-compete based on the inadequacy of a business’ relationship with former clients.

Background

Defendants Evans and Chinn were former independent contractors performing work for Generic Solution Engineering, LLC d/b/a Tech Guys Who Get Marketing (“Tech Guys”). Only Chinn was subject to a non-compete provision in his independent contractor agreement. Chinn and Evans left Tech Guys to form their own company, X-Tech, which provides similar services to similar customers, including former Tech Guys customers RRI and E-data.

Following the typical path of non-compete litigation, Tech Guys filed suit and moved for a temporary injunction restraining Chinn and Evans from performing work for former clients RRI and E-data. The trial court granted Tech Guys’ motion as to Chinn and denied it as to Evans because Evans was not subject to a non-compete agreement.

Chinn appealed the order granting the temporary injunction against him and the appellate court reversed. The appellate court held that employers do not have a legitimate business interest in their relationships with former clients sufficient to support enforcement of a non-compete.

Relevant Law

Florida Statute § 542.335 allows for enforcement of restrictive covenants only where “the restraint [is] shown to be reasonably necessary to protect the ‘legitimate business interests’ justifying the restriction.” Evans at *2 (quoting Henao v. Prof’l Shoe Repair, Inc., 929 So.2d 723, 726 (Fla. 5th DCA 2006)). The Evans case acknowledges that “’the right to prohibit the direct solicitation of existing customers’ is a legitimate business interest” sufficient to support enforcement of a non-competition agreement. Id. (quoting Hilb Rogal & Hobbs of Fla., Inc. v. Grimmel, 48 So. 3d 957, 961 (Fla. 4th DCA 2010)).

The Court, however, also noted several prior cases distinguishing between an employer’s relationships with current or future clients as opposed to former clients. Id. (citing Envtl. Servs., Inc. v. Carter, 9 So.3d 1258, 1265 (Fla. 5th DCA 2009)(enforcing non-compete because of “substantial relationships with specific prospective or existing customers”); Ethan Allen, Inc. v. Georgetown Manor, Inc., 647 So.2d 812 (Fla.1994)(tortious interference not actionable where interference is based on relationship with past customers); see also Shields v. Paving Stone Company, Inc., 796 So. 2d 1267 (Fla. 4th DCA 2001).

Lessons

The takeaway for employers is that they must be careful to point to adequate legitimate business interests when seeking to enforce non-compete agreements. Employers must identify specific prospective or existing clients being solicited by former employees. Relying on a former employee’s interference with a former client will be insufficient to enforce a non-compete agreement.

Fifth Circuit Affirms Rejection of Texas Choice-of-Law as to Oklahoma-Based Employees for Non-Compete Provisions, But Allows Texas Law to Apply to Non-Solicitation Provisions

redriverIn a detailed, 26-page published decision in the matter of Cardoni v Prosperity Bank, No. 14-20682 (5th Cir. Oct. 29, 2015) the Fifth Circuit Court of Appeals took a deep look at choice of law provisions in restrictive covenants. The Appellate Court started out by noting that in addition to their well-known disagreements over boundaries and football, Texas and Oklahoma do not see eye to eye on the enforceability of non-compete agreements. Texas generally allows them, Oklahoma does not.

The case arose after Texas-based Prosperity Bank acquired Oklahoma-based F&M Bank and Trust Company. Key employees were required to sign employment agreements containing non-compete, non-solicit, and non-disclosure provisions. Less than a year after the merger, four employees decided to leave and filed declaratory judgment actions in state court in Oklahoma seeking to invalidate the agreements under Oklahoma law. Prosperity filed suit in Texas seeking to enforce the agreements, citing the Texas choice of law and choice of venue provisions. After both cases were removed to Federal Court, they were consolidated in Houston based on the exclusive venue provision. While honoring the choice of venue provision, the District Court found that Oklahoma law applied to both the non-compete and non-solicit provisions in the agreement and they were unenforceable. The trial court also found that Texas law governed the non-disclosure provision, but there was not sufficient proof of a breach to support an injunction.

The Fifth Circuit opinion affirmed in part and reversed in part, noting the following:

  1. In football, University of Texas leads the University of Oklahoma 61-44-5 in the “Red River Rivalry.”
  2. The Texas-based company’s interest in maintaining uniform contracts for multi-state employees was not greater than Oklahoma’s interest in regulating (in this case invalidating) restrictions on Oklahoma employees’ ability to work and earn a living.
  3. Non-solicit agreements do not have the same public policy arguments because Oklahoma employees can still work and earn a living even if refraining from soliciting customers, so the Texas choice of law provision can be enforced with respect to the non-solicitation provision. (Oklahoma law bars traditional non-competition agreements, but does not bar agreements prohibiting the solicitation of customers.)
  4. Although the Texas choice of law provision was enforceable as to the non-disclosure provision, there is no well-established “inevitable disclosure” doctrine in Texas, so Prosperity Bank had to prove actual disclosure to obtain an injunction.

In its decision, the Court of Appeals noted that although the U.S. Supreme Court has made it clear that courts should give effect to knowing and voluntary agreements between parties to arbitrate disputes, and recently ruled that forum selection clauses should be enforced in all but the most exceptional cases, public policy considerations still come into play with regard to choice of law provisions: “Unlike arbitration and forum selection clauses, which dictate where a dispute will be heard, choice-of-law provisions dictate the law that will decide the dispute, and thus create more tension with a state’s power to regulate conduct within its borders.” Thus, even though the choice of forum clause meant the dispute was heard in Texas, the public policy concerns of Oklahoma, where the employees resided, took precedence over the choice of law provisions in the contract that they signed.

The decision blows tumbleweeds in the way of multi-state employers who wish to utilize a “one size fits all” agreement in Oklahoma, even if the agreement contains a choice of law and exclusive choice of forum provision selecting a state which favors enforcement of non-compete agreements. Although many courts in other jurisdictions have relied on choice of law/choice of forum clauses to enforce certain restrictive covenants against employees residing in states with strong public policies against such restrictions (such as California), in this case the terms of the contract did not carry the day. Employers relying on a “one size fits all” strategy should proceed cautiously, and at least consider the possibility that the law of the state where the employee lived and worked may trump a choice of law provision to the contrary.

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