New Indiana Law Governs Physician Non-Compete Agreements

In the midst of the COVID-19 pandemic, Indiana has enacted a new law governing non-compete agreements used with physicians.

Our Practice Group members in Indianapolis authored an article detailing the new law’s requirements.  As the article notes, the new law raises multiple unanswered questions.

And, while not as sweeping as other statutes, Indiana now joins the parade of states enacting new laws limiting the use of non-compete agreements.  We will continue to monitor all state law developments.

SCOTUS to Hear CFAA Case

It’s not often that a case in our practice area reaches the Supreme Court of the United States, so we are genuinely excited!

In Van Buren v. United States, No. 19-783, the U.S. Supreme Court will have a chance to resolve (finally) the circuit split regarding the scope of the Computer Fraud and Abuse Act.  Some circuits (the 2nd, 4th and 9th) take a narrow view of the CFAA, allowing claims against employees who lacked any authorization to access information stored on computers, but not allowing claims against employees who were permitted access and misused that access for allegedly improper purposes.  Other circuits (the 1st, 5th, 7th, and 11th) permit CFAA claims against employees for misusing information stored on the computer even though they otherwise were authorized to access such material.  We have posted about this circuit split previously.

Jackson Lewis’s Non-Competes and Protection Against Unfair Competition practice group, in conjunction our Privacy, Data and Cybersecurity practice group, published an article explaining the Van Buren case and its potential impact.

We currently have a nation of employees working remotely.  Regardless of the ultimate outcome at the Supreme Court, employers should consider reviewing and clarifying now their policies concerning which employees have access to what data.  We will monitor the Van Buren case and provide updates.

 

 

Virginia Bans Non-Competes for Low(er)-Wage Workers

Is anyone focusing on anything other than the COVID-19 Pandemic?  Apparently, the Virginia legislature and governor are undeterred, enacting a series of new laws.  Among them, Virginia has banned non-compete agreements for lower wage earners, becoming the most recent state to do so.  A summary of the key provisions is included in this article written by our Virginia colleagues Matt Nieman and Jason Ross: https://www.jacksonlewis.com/publication/virginia-enacts-wage-theft-non-compete-laws-amidst-flurry-new-employee-protections 

 

Texas Court Rejects Effort To Dismiss Non-Compete Lawsuit On Free Speech Grounds

Texas courts are increasingly encountering efforts to challenge restrictive covenant agreements on free speech grounds, where the restricted activity includes business-related communications. A recent Texas appellate court decision indicates that this strategy has its limits.

In Hieber v. Percheron Holdings, LLC, No. 14-19-00505-CV (Tex. App.—Houston [14th Dist.] Nov. 14, 2019), Percheron Holdings, LLC (“Percheron”) sued Hieber, a former sales executive, for violation of a non-compete and non-solicitation agreement, based on Hieber’s employment with a Percheron competitor and alleged communications with Percheron’s clients during industry meetings and social functions. Hieber responded by moving to dismiss the lawsuit pursuant to the Texas Citizens Participation Act (“TCPA” or the “Act”).

The TCPA does not strictly prohibit lawsuits arising out of a defendant’s free speech activities, but rather it imposes a heightened pleading standard in such cases. The purpose of the Act “is to encourage and safeguard the constitutional rights of persons to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the rights of a person to file meritorious lawsuits for demonstrable injury.”

Under the TCPA, a defendant may move for dismissal of a legal action that arises out of “a party’s exercise of the right of free speech, right to petition, or right of association,” if the plaintiff has not pleaded specific facts to support each element of the asserted causes of action. In response to such motion, the plaintiff must articulate the requisite factual basis, or else demonstrate that such basis already has been pleaded. Effectively, the TCPA elevates the required pleading standard for such actions from notice pleading to fact pleading. A plaintiff’s failure to meet the elevated pleading standard in response to such a motion carries the severe consequence of dismissal with prejudice.

Further, the TCPA sets forth a commercial-speech exemption, which provides that the Act “does not apply to a legal action brought against a person primarily engaged in the business of selling or leasing goods or services, if the statement or conduct arises out of the sale or lease of goods, services, or an insurance product, insurance services, or a commercial transaction in which the intended audience is an actual or potential buyer or customer.”

Hieber argued in his motion to dismiss that the activities Percheron characterized as solicitation of customers constituted the exercise of free speech under the TCPA. However, in defeating the motion, Percheron convinced the court that the speech at issue fell within the commercial-speech exemption. Specifically, Percheron established that Hieber was engaged in communications with actual or potential customers of LJA for the purpose of persuading them to engage his new employer as their service provider.

In his attempts to rebut Percheron’s argument, Hieber argued that he “did not sell anything” but was merely an employee of the seller. The court rejected that argument on the grounds that the commercial-speech exemption applies just as much to employees as to a business itself, and because the exemption does not require the defendant to be responsible for a completed transaction. The court explained, “even a proposed transaction will suffice.” The court also rejected Hieber’s argument that the conduct at issue, including his attendance at industry/charity events, did not implicate any efforts by him to sell services to LJA’s actual or potential customers. As the court noted, the entire purpose of those activities was to acquire additional business for LJA.

A review of published case law in Texas reveals approximately twenty cases in the past two years where a former employee moved to dismiss a non-compete or similar restrictive covenant lawsuit under the TCPA. While Percheron successfully invoked the TCPA’s commercial-speech exemption to sustain its claim arising from Hieber’s alleged solicitation of former customers, this exemption only covers customer communications, and may not relate to the majority of potential restrictive covenant violations (e.g., association with a competitor, disclosure of proprietary information to a competitor, solicitation of employees, etc.). As such, employers pursuing restrictive covenant litigation in Texas should first confer with experienced counsel as to whether the TCPA applies to their claims, and, if so, whether there is sufficient information about the alleged violations to establish the Act’s heightened pleading requirements. Employers are encouraged to contact a Jackson Lewis attorney for assistance in this process.

Massachusetts High Court Upholds Enforcement of Employee Non-Solicitation Covenant

Over the past few years, legislators and government agencies at both the state and federal levels have pushed reforms limiting the use of non-competes and other restrictive covenants by U.S. businesses. Some of those efforts have extended to covenants that restrict a party’s ability to solicit and/or hire employees who are not party to the agreements in question.

In the midst of these headwinds, a new decision from the Massachusetts Supreme Judicial Court, Automile Holdings, LLC v. McGovern, SJC-12740 (Mass. Jan. 14, 2020), stands out for its approval of an anti-raiding provision. Our article discussing the McGovern decision can be found here.

Senate Committee Holds Hearing On Recently Proposed Federal Non-Compete Bans

On November 14, 2019, the U.S. Senate Committee on Small Business and Entrepreneurship held a hearing to examine recently proposed bills that would regulate non-compete agreements at the federal level. Discussion during the hearing indicates that it may have the necessary support to move forward.

Pending Non-Compete Legislation

On October 15, 2019, Senators Chris Murphy (D-CT) and Todd Young (R-IN) introduced the 2019 Workforce Mobility Act, which would ban all non-compete agreements across the country, with limited exceptions involving the sale of a business or the dissolution of or disassociation from a partnership (see A Renewed Attempt in Congress to Eliminate Non-Compete Agreements, dated November 18, 2019). The Act would also require employers to notify employees of the law’s requirements, and would establish a comprehensive enforcement scheme empowering the Federal Trade Commission, the Department of Labor, and aggrieved employees to seek redress for violations of the law.

The Workforce Mobility Act constitutes a far more extreme approach to non-compete reform than Senator Marco Rubio’s Federal Freedom to Compete Act, which was introduced on January 15, 2019 and would only permit the use of non-competes with respect to FLSA-exempt executive, administrative, professional, or outside sales employees. While those FLSA exemptions are not completely predictive of an employee’s work experience or wage rate, the stated objective of Senator Rubio’s legislation was to protect “entry-level, low-wage workers[.]”

The Hearing on Non-compete Agreements and American Workers

Last week, the Senate Committee on Small Business and Entrepreneurship reviewed the 2019 non-compete bills at a hearing entitled “Noncompete Agreements and American Workers.” Testifying at the hearing were:

  • Evan Starr — Assistant Professor of Management and Organization, University of Maryland School of Business;
  • John Lettieri — President and Chief Executive Officer of Economic Innovation Group; and
  • Keith Bollinger – A North Carolina resident who testified about the negative consequences that a non-compete agreement allegedly posed in his effort to pursue gainful employment.

Professor Starr’s research figured prominently in the Obama Administration’s State Call to Action, which urged state governments to impose strict limitations on the use of non-compete agreements. More recently, Professor Starr authored a brief entitled, “The Use, Abuse, and Enforceability of Non-Compete and No-Poach Agreements,” which further advocated in favor of non-compete reform. That brief was published by Economic Innovation Group — Mr. Lettieri’s organization. Notably, the hearing did not include testimony from any non-compete proponents.

The testimony of Professor Starr and Mr. Lettieri was largely supportive of the 2019 Workforce Mobility Act, which would ban non-competes completely in the traditional employment context. Both expressed the view that employers could protect their legitimate business interests through less restrictive measures, including client non-solicitation covenants, agreements barring the use or disclosure of trade secrets, and the enforcement of federal and state trade secret laws. Professor Starr and Mr. Lettieri also advocated for further measures to protect workers, including:

  • Requirements obligating employers to educate their employees of the applicable (i.e., state-specific) non-compete laws;
  • Requirements obligating employers to give advanced notice of any obligation to sign a non-compete agreement;
  • The imposition of strict penalties on employers who imposed unlawful or overly burdensome non-compete agreements on employees; and
  • Requirements that employers continue paying employees for the duration of any post-employment non-compete restrictions.

Senators who spoke during the hearing included: Marco Rubio (R-FL), Todd Young (R-IN), John Kennedy (R-LA), Mitt Romney (R-UT), Josh Hawley (R-MO), Ben Cardin (D-MD), Maria Cantwell (D-WA), Jeanne Shaheen (D-NH) and Mazie Hirono (D-HI). Of them, Senators Young, Hawley, and Cardin offered the strongest endorsements of the 2019 Workforce Mobility Act. Senator Rubio also appeared to accept the policy justifications behind a complete ban, although he closed the hearing by seeking to build a consensus around his own proposal to prohibit non-competes for “low-wage employees.” Of the remaining participants, Senators Romney and Kennedy were the only legislators to express opposition to federal non-compete reform.

What Next?

The November 14 hearing offered a brief preview of Congressional attitudes towards federal non-compete reform. The coming months will offer further clarification as to whether, and to what extent, legislation has the prospect of becoming law. We will continue to update readers on any developments. Employers with questions about the lawfulness of their restrictive covenant agreements are encouraged to contact a Jackson Lewis attorney.

Court Rejects Delaware Choice of Law Provision in Refusing to Enforce Customer Non-Solicitation Covenant Against California Employee

On August 26, 2019, the Delaware Chancery Court invalidated a California employee’s customer and employee non-solicitation covenant on the grounds that it violated California law. In doing so, the Court rejected the plaintiff company’s attempt to override California law by including a Delaware choice of law provision in the underlying agreement.

Background

We initially reported on the case of NuVasive v. Miles, Case No. 2017-0720-SG, on December 10, 2018, after the Chancery Court denied the defendant employee’s original motion for partial summary judgment. NuVasive, a Delaware corporation with headquarters in California, hired Miles as an executive-level employee in California. Upon his hiring, Miles entered into an employment agreement with Nuvasive containing a non-competition covenant as well as both customer and employee non-solicitation covenants. The agreement also included Delaware choice of law and choice of forum provisions.

When Miles resigned and joined a competitor, NuVasive sued in Delaware to enforce the non-competition and non-solicitation covenants. In response, Miles alleged that the restrictive covenants, as well as the choice of law and choice of forum provisions, were unenforceable under California law.

Court Initially Upholds Delaware Choice of Law Provision

In its order dated September 28, 2018, covered in our original article, the Chancery Court examined the validity of the agreement’s Delaware choice of law provision, asking:

      • Would another state’s laws apply in the absence of a choice of law provision?
      • If so, would enforcing the non-compete covenant violate a fundamental public policy of that other state?
      • If so, are the other state’s applicable public policy interests materially greater than the applicable public policy interests of Delaware?

Because Miles resided, worked, and sought to compete in California, the Chancery Court determined that the restrictive covenants would normally be subject to California law in the absence of a choice of law provision. The court further held that enforcement of the non-compete covenant under Delaware law would violate California’s fundamental public policy interests in light of: (1) Section 16600 of the California Business and Professional Code, which strictly prohibits all restraints on competition in the employment context; and (2) Section 925 of the California Labor Code, which prohibits choice of law or choice of forum provisions that circumvent California’s statutory protections or restrict access to a California judicial forum. The court declined at the time to render a judgment about the customer and employee non-solicitation covenant, due to the lack of clarity about whether such covenants also were prohibited under Cal. Bus. & Prof’l Code Section 16600.

As for the third question, the Chancery Court held in the initial order that California’s public policy interests against the enforcement of non-compete covenants did not outweigh Delaware’s own public policy interests favoring freedom of contract. The court based its conclusion on the assumption that Miles negotiated the employment with the assistance of counsel. Although California Labor Code Section 925 generally prohibits parties from contracting around California substantive laws and California judicial forums, it carves out an exception with respect to employees who are represented by their own legal counsel during the contract negotiations. By that carve-out, the court reasoned, the California Legislature recognized “that in the limited subset of cases where the inequality of bargaining strength of the parties to an employment contract is buffered by the employee being represented by independent counsel, and where counsel participated in negotiation of the terms of a choice of law provision, California’s interest in freedom of contract outweighs interest in freedom of employment.”

Court Reverses Course and Rejects Restrictive Covenants under California Law

Notwithstanding the court’s September 28, 2018 order, Miles subsequently submitted sufficient evidence to persuade the court that he had not, in fact, been represented by counsel during the negotiation of the employment agreement. With these facts, on June 7, 2019, the court reversed its earlier decision and held that the non-compete covenant was subject to and invalid under California law.

Although the court invalidated only the non-compete covenant in its June 7, 2019 order, it requested further briefing from the parties as to whether the non-solicitation covenant also was contrary to California public policy. In the August 26, 2019 order, the court answered that question in the affirmative.

In reaching this conclusion, the Chancery Court noted that California courts have classified customer and employee non-solicitation covenants as “restraints” on competition, even if they fall short of prohibiting competition entirely. The Chancery Court pointed to the California Supreme Court decision in Edwards v. Arthur Anderson LLP, 189 P.3d 285, 292 (Cal. 2008), which held that a restriction on one’s ability to perform work for certain clients constitutes an invalid restraint on competition under Cal. Bus. & Prof’l Code Section 16600. More recent decisions have applied similar reasoning to invalidate employee non-solicitation covenants, although the case law regarding employee restrictions is less settled.

The Chancery Court’s decision hinged on its refusal to honor the parties’ contractual choice of law, based on California Labor Code §925. Oddly, however, Miles signed his employment agreement containing the Delaware choice of law and forum provisions in 2016, before the effective date of California Labor Code §925. It is unclear whether such an argument might have impacted the Chancery Court’s decision.

Conclusion

In summary, the Chancery Court held that Miles’ non-compete and non-solicitation covenant were both void under California law, and, therefore, enforcement of the covenants would be contrary to California public policy. Moreover, NuVasive could not invoke the employment agreement’s Delaware choice of law and choice of forum provisions to circumvent California’s ban on such covenants because Miles had not retained an attorney to assist in the negotiation of the agreement. As such, the court dismissed NuVasive’s breach of contract claims.

As this case highlights, employers should be careful when attempting to enter into restrictive covenant agreements with California employees, and should always do so with the assistance of an experienced non-compete attorney. This case also shows that it can be to the employer’s interest to ensure that the other party has legal representation, in certain circumstances.

Companies needing assistance in the drafting of restrictive covenants are encouraged to contact a Jackson Lewis attorney for further guidance.

Virginia Attempts, Maryland Succeeds, in Limiting Non-Competes For Low-Wage Employees

In numerous states throughout the country, legislatures are moving to limit the use and enforcement of non-compete and other restrictive covenant agreements. Two such states, Maryland and Virginia, are seeking to curtail such agreements with regard to low-wage employees.

Virginia Senate Bill 1387

On January 17, 2019, the Virginia Senate introduced SB 1387, which would prohibit employers from “enter[ing] into, enforc[ing], or threaten[ing] to enforce a covenant not to compete with any low-wage employee.” A “low-wage employee” is defined as one who earns less than the average weekly wage of the Commonwealth,[1] and includes interns, students, apprentices, and trainees, whether or not they are being paid for their work, as well as some independent contractors.[2]

Senate Bill 1387 also would prohibit covenants not to compete that “restrict an employee from providing a service to a customer or client [whom] the employee does not initiate contact with or solicit[.]” A covenant not to compete is broadly defined as an agreement “between an employer and employee that restrains, prohibits, or otherwise restricts an individual’s ability, following the termination of the individual’s employment, to compete with the former employer.”

In addition to banning non-competes for low-wage employees, the bill would establish a private right of action for low-wage employees against any former employer (or other person) who attempts to enforce a prohibited agreement. An affected employee must commence the action within two years of the latter of: (1) the date the agreement was signed, (2) the date the low-wage employee learned of the agreement, (3) the date the employment relationship was terminated, or (4) the date the employer attempted to enforce the agreement. In addition to authorizing awards of injunctive relief, compensatory damages, liquidated damages and costs and attorney fees, Senate Bill 1387 would require courts to assess a civil penalty against culpable employers in the amount of $10,000 for each violation.

Additionally, all employers would be required to post a copy of the Bill (or an approved summary) ”in the same location where other employee notices required by state or federal law are posted.” Violations of this requirement would subject employers to penalties of escalating severity (written warning for first violation; civil penalty of up to $250 for second violation; and civil penalties of up to $1,000 for each subsequent violation).

On February 12, 2019, the Senate Committee on Commerce and Labor designated SB 1387 as “passed by indefinitely.” As of the current date, it is unclear whether the Committee will give it further consideration.

Maryland Senate Bill 328

On January 30, 2019, the Maryland Senate initiated a similar effort when it introduced SB 328. Less than four months later, after passing the Senate and House, the bill took effect without the Governor’s signature.

At first glance, MD 328 appears far more restrictive than VA SB 1387, as it declares all “noncompete [provisions] that restrict[] the ability of an employee to enter into employment with a new employer or to become self-employed in the same or similar business or trade” as “null and void as being against the public policy of the State.” However, the introductory section makes clear that the non-compete ban only applies “to an employment contract or a similar document or agreement concerning an employee who earns equal or less than […]$15.00 per hour; or […] $31,200 annually[.]” Although the Bill does not clarify whether it applies to restrictive covenants that fall short of prohibiting competition, such as customer non-solicitation covenants, it expressly excepts from its coverage any “employment contract[s] or similar document[s] or agreement[s] with respect to the taking or use of a client list or other proprietary client-related information.”

In contrast to VA SB 1387, which stalled out in committee, MD SB 328 passed both the House and Senate on April 5, 2019. Pursuant to Maryland’s Constitution, Governor Larry Hogan was required to sign or veto the bill by May 25, 2019, or else do nothing and allow it to become law automatically. Ultimately, Governor Hogan chose the latter option, and the Bill automatically became law, subject to an effective date of October 1, 2019.

In summary, while the Virginia Legislature has not acted to advance SB 1387, Maryland has enacted its own ban on non-competes for low-wage employees. We will continue to follow the Virginia bill and will update readers on any developments. Employers needing assistance in complying with the non-compete laws of the states in which they operate are encouraged to contact a Jackson Lewis attorney for further guidance.

[1] The average weekly wage is determined by the Virginia Employment Commission (the “Commission”) by adding the total wages (excluding wages of U.S. government employees) reported on contribution reports to the Commission for the 12-month period ending the preceding June 30 and divided by the average monthly number of insured workers and then divided by 52. In March 2018, for example, the average weekly wage in Virginia was $1,152.

[2] Low-wage employees include independent contractors who are paid at an hourly rate that is less than the median hourly wage for the Commonwealth of Virginia for all occupations as reported, for the preceding year, by the Bureau of Labor Statistics of the U.S. Department of Labor. In May 2017, for example, the median hourly wage for the Commonwealth of Virginia for all occupations was $19.13.

Trade Secrets – Courts Won’t Protect You If You Don’t Protect Yourself!

A decision from the Northern District of Illinois is the latest to reiterate a stern warning we have long highlighted for employers: when insufficient steps are taken by an employer to protect its own proprietary information, courts will not provide trade secret protection when such information is misappropriated.

In Abrasic 90 Inc. v. Weldcote Metals, Inc., No. 18-cv-05376 (N.D. Ill. March 4, 2019), the plaintiff-company Abrasic 90 Inc. (“Abrasic”), a manufacturer of abrasives products, sued several of its former employees (including its former president) and a competing company they formed, Weldcote Metals, Inc. (“Weldcote”), for misappropriation of its trade secrets in violation of the federal Defend Trade Secrets Act of 2016 and the Illinois Trade Secret Act. Abrasic alleged its former president retained a flash drive from his employment with Abrasic that contained “a comprehensive summary of [Abrasic’s] transactional information, including sales data, prices, and costs for its products and the identities of its suppliers and distributors.” Abrasic also claimed that the other individual defendants possessed similar information to be used in their subsequent employment with the competing company. In addition to demanding monetary damages, Abrasic sought to enjoin Weldcote and the individual defendants from using the information at issue in the competing enterprise, as well as from doing business with Abrasic’s suppliers and distributors.

The Court denied Abrasic’s motion for a preliminary injunction, however, finding that Abrasic could not show that its information warranted trade secret protection. The Court chose this matter to reiterate a valuable—albeit sometimes painful—lesson for employers: if you don’t protect your trade secrets, neither will the courts.

The Court recounted the well-known rule that for information to be considered a trade secret, it must have been “sufficiently secret to impart economic value because of its relative secrecy,” and “reasonable efforts to maintain the secrecy of the information” must have been taken. The Court found the first factor was satisfied for purposes of the motion, because the information purportedly misappropriated consisted of business and financial information, and was compiled in such a manner that it would “require substantial time, effort, and expense to recreate the compilation.” But the Court held that Abrasic failed to establish the second factor because it “took almost no measures to safeguard the information that it now maintains was invaluable to its competitors.” The Court gave a litany of suggested steps that employers can and should take to protect their proprietary information sufficient to cloak such information with trade secret protection, including:

  • Requiring those with access to trade secrets to enter into non-disclosure and confidentiality agreements;
  • Establishing and implementing policies concerning the confidentiality of the company’s business information, including specifying the categories of information deemed by the company to be confidential;
  • Training company employees about their obligation to keep such categories of information confidential;
  • Ensuring all confidential information is returned to the company upon the cessation of employment of any employee with access to such information;
  • Ensuring that company employees with responsibility for maintaining sensitive company data and information are trained on data security, and that the company maintains and implements comprehensive data security policies and practices;
  • Restricting access to sensitive company information to employees on a need-to-know basis, such as giving employees a one-time-only password to access the information; and
  • Differentiating access to sensitive company information from access to non-sensitive company information.

While an employer does not necessarily need to take all of these example measures to confer trade secret protection, Abrasic allegedly failed to establish that it effectively implemented any such measures.  About the only protective measure Abrasic took, according to the Court, was to require some employees with access to the alleged proprietary information to agree to maintain its secrecy.  However, even that measure was ineffective, because Abrasic provided the same access to other employees and independent contractors without imposing similar conditions of non-disclosure.  Therefore, the Court held that the company could not show that its claims had a likelihood of success—dooming its preliminary injunction motion.

As this decision confirms, employers cannot rely on the courts to protect their valuable trade secrets, unless they have done their job to minimize the potential for misappropriation. To ensure that you are taking the appropriate steps to safeguard your trade secrets and confer protection in the courts, please contact a member of Jackson Lewis’s Non-Competes Practice Group.

Washington Governor Signs Non-Compete Law

On May 8, 2019, Washington Governor Jay Inslee signed into law HB 1450, described as “AN ACT Relating to restraints, including noncompetition covenants, on persons engaging in lawful professions, trades, or businesses[.]”  While the Act does not take effect until January 1, 2020, its restrictions apply retroactively to existing agreements signed before that date.

Our article discussing the law, which was posted just as Governor Inslee was signing the bill, can be found here.  Companies with questions about how to comply with the new law are encouraged to contact a Jackson Lewis attorney for further guidance.

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