Attorneys are often asked by both employers and executives, “Are these non-competes even enforceable?” In most states, the answer is “yes,” provided they are done correctly. Continue reading this entry
When the U.S. Congress enacted it in 1996, the Economic Espionage Act (EAA) made the theft, transmission, or receipt of trade secrets a federal crime. Two recent amendments to the law add new teeth to the law and suggest that employers might be wise to revisit their trade secret policies, protection mechanisms, and training programs in response. Continue reading this entry
A key executive, top salesperson, or high-level engineer is joining a fierce competitor after being exposed to your company’s most confidential and proprietary information and trade secrets. The business leaders are very upset and demand action, but for one reason or another — company or industry culture, hiring needs, oversight, deception — there is no non-competition agreement with the departing employee. There are several steps you can consider taking, including :Continue reading this entry
If three Democratic senators have their way, some companies may soon be able to protect their valuable trade secret information under federal law. On July 17, 2012, senators from Wisconsin, Delaware, and Rhode Island introduced a bill, the Protecting American Trade Secrets and Innovation Act of 2012 that would allow companies that face certain kinds of trade secret theft to bring suit in federal court.Continue reading this entry
The Illinois Supreme Court has determined that, notwithstanding a 2009 Illinois appellate court decision to the contrary (Sunbelt Rentals, Inc. v. Ehlers), Illinois courts must consider whether a former employer’s noncompete agreement protects a legitimate business interest. In Reliable Fire Equipment Co. v. Arrendondo, the Court reflected on the Fourth District Appellate Court’s Sunbelt decision and determined that the court in that case “overlooked or misapprehended” the Illinois Supreme Court’s extensive body of law on the subject.
Trade secrets are in the national spotlight—they are the focus of a ready-to-be signed state law, a proposed Senate amendment, and part of the newly updated Patent Act. Historically, trade secrets have been given short shrift, giving legal protection only through a patchwork of common laws and state statutes. Different states offered different protection. This has posed problems and headaches for businesses that stretch across state and international borders and rely on the protection of their trade secrets to compete.
One would think that a civil jury award of $1.3 billion (even one that may be subsequently reduced by a judge to $272 million) would provide sufficient warning to companies about the perils of trade secret litigation. But, as the long-running dispute between SAP AG and Oracle Corporation makes clear, defendants should be concerned not just about the possibility of an adverse civil judgment, but also the possibility that matters can get much worse. To wit, earlier this month, SAP pleaded guilty to numerous criminal charges stemming from its trade secret dispute with Oracle.
Should physicians be subject to a different noncompete standards than other professionals? Several states have established laws, through statute and case law, on the topic of physician non-competes, and yet we are still far from a consensus.
We all know that California does not permit enforcement of non-compete agreements. Despite this broad prohibition, the federal court’s recent decision in Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11-CV-02460-LHK, 2011 WL 2607158 (N.D. Cal. July 1, 2011) confirms another overriding general rule: courts do not like deceptive behavior of former employees – even in California. This decision makes it clear that when faced with egregious facts, you may have to think twice about the enforceability of non-compete agreements in California.
On May 11, 2011, Georgia Governor Nathan Deal signed into law a statute that provides the capstone to a significant revision in the state’s acceptance of restrictive covenants, which should make it easier to enforce noncompetition, nonsolicitation, confidentiality and other such contractual provisions.
In an effort to promote responsible business practices, mass-market retailers often require their suppliers throughout the world to adhere to same ethical and compliance standards that the retailers (and/or U.S. law) demand of themselves. The goals of such standards are no doubt laudable – banning the use of child or forced labor, promoting environmentally responsible practices, ensuring safe and healthy workplaces and products, prohibiting bribery and other unethical business practices, and so forth. So it would seem to be an easy decision for suppliers to agree contractually to be bound by the same standards. Maybe.
As many of us in the noncompete world are aware, the law of noncompetes is constantly evolving and changing, sometimes by court decisions like the Sheshunoff decision in Texas, and sometimes by statute, like in Oregon.
There are three legislatures currently considering new noncompete bills: Georgia, Illinois and Massachusetts (linked to my good friend and former colleague Russ Beck’s fantastic blog). Consistent with the patent inconsistency in the noncompete law across the country, some bills seek to strengthen noncompete agreements and some to weaken such agreements, and some of the arguments (generally having to do with increasing business in the state in question) are used to support both types of statutes.
Thanks to Avant Resources, I will be speaking on drafting and enforcing noncompetes, as well as the latest developments in the law, including with respect to the three bills before state legislatures, on May 17, 2011 at 3 PM ET. I hope you will join me for that presentation. If you have questions you would like to ask ahead of time, please feel free to post those questions in the comments to this blog.
A federal court in Washington State issued a ruling last week in Edifecs, Inc. v. Tibco Software, Inc., further limiting grounds for seeking trade secret relief arising out of the acquisition by a licensee of the licensor’s primary competitor. The United States District Court in Seattle dismissed trade secret claims that were based on the failure by the licensee to prevent employees who had worked extensively with the licensor’s confidential information from working on business of the newly acquired competitor because that failure, alone, was not a sufficient threat to the disclosure of admittedly confidential, proprietary technology.
A technological solutions company that emailed policy updates to its employees, but did not have the employees sign for the update, could not enforce a noncompete provision against one of its employees in Mississippi. The court ruled that the update might have been enforceable if it did not contain a signature line, which the employee never signed.
Employers can be subject to lawsuits for actions they take after an employee leaves their employment. Luzenac American fired Sanford Lee Hertz in January 1998. Shortly after his termination, Mr. Hertz sued Luzenac for religious discrimination and retaliation in connection with the firing. The case went to trial and a jury returned a verdict in favor of Mr. Hertz.
While the case was on appeal, Mr. Hertz entered into a consulting agreement with IMI Fabi to help it manufacture and market a product to compete with a Luzenac product. Once Luzenac got the news, it sent a letter to Mr. Hertz demanding he stop misappropriating its trade secrets. Luzenac’s counsel sent a cease-and-desist letter to Mr. Hertz’s counsel, copying IMI Fabi, alleging that Mr. Hertz was illegally using Luzenac’s proprietary information to compete against it.
As mentioned in last week’s Employment Law Update, often the best candidate to hire is an individual who has successfully worked in a similar role in your industry.
To further decrease the chances of a lawsuit, consider these additional proactive steps to minimize the risks:
- Make employment expressly contingent on the individual’s respect for the confidentiality of the former employer’s information. For example, the offer letter could say:
[New company] desires to employ you because of your general industry knowledge and experience, your skills, and your strong personal traits. We do not want to improperly access your prior employer’s confidential business information. Therefore, you understand and agree that as a mandatory condition of your employment with [new company], you shall not disclose or use any conditional business information of any prior employer that you have a duty to retain as confidential. Any violation of this requirement will result in corrective action, up to and potentially including termination of employment.
- Tell the new hire to comply with the current/former employer’s policies, including offering a notice period (two weeks, typically), submitting to an exit interview, and even offering to discuss with his/her last supervisor the status of projects and location of information in paper and electronic files. While the candidate need not offer information about his/her new employer or the scope of the new job’s responsibilities, the candidate should be truthful if asked. (A string of lies will contribute to a claim that the individual is up to no good.)
- At the outset of the new employment, have the individual identify those specific projects, communications, or responsibilities that would likely require him/her to disclose or use some confidential information of the former employer. Figure out and implement some type of screening mechanism on that particular topic.
If the former employer threatens to sue, you might choose to disclose to them the extent to which you implemented these proactive steps. Even if they do not believe that these fully and effectively protect their confidential information from competitive misuses, they will likely recognize that these drastically reduce their ability to convince a judge that the employee and your company, as the new employer, are up to no good and must be stopped. Many lawsuits can be avoided if the hiring employer smartly follows a process and creates an evidentiary trail that demonstrates the opposite.
Often the best candidate for an important, open job at your company is an individual who has successfully worked in a similar role in your industry. Additionally, that top candidate often works for a direct competitor that will not be happy to learn that the person has taken a job with your company. If the individual is a valuable asset to that competitor, it may choose to sue him or her — and possibly your company as well — alleging that its confidential business information or customer relationships are unfairly jeopardized in violation of a noncompete or confidentiality agreement, or even the trade secret law. A lawsuit is even more likely if the circumstances of the job change (that is, the resigning, the hiring, or both) fuel the former employer’s suspicions and fears that the individual and the new employer intend to compete unfairly by use of the former employer’s confidential business information.
In those situations, the hiring company can help minimize the chances of a lawsuit by following some thoughtful best practices during the interviewing and hiring processes, such as:
- Before any interviews take place, tell candidates that you need them to be mindful during the interview process not to disclose any confidential business information of their current employers. Additionally, remind your interviewing managers not to dig for or even ask about confidential business information about competitors during the interviews.
- Often candidates are anxious to impress you with explanations of the exciting, cutting-edge projects on which they are working; yet those are precisely the circumstances that may prompt the former employer to react negatively (with litigation) when it learns that a former employee has joined a competitor.
- Require the candidate to disclose, early in the process, any agreements with the current or former employer that contain post-employment restrictions like noncompete, nonsolicitation, and confidentiality obligations. Have those agreements reviewed by legal counsel with specific experience in this area to get both legal and strategic advice about navigating around the legal issues.
- Instruct the candidate not to take or retain any confidential business information from the current/former employer. Explain that the employer may initiate a forensic analysis of the individual’s computer, smart phone, or voice mail, as well as its own computer network and/or security systems, to try to discover any theft of information.
Part II of this article will appear in next week’s Employment Law Update.
In H&R Block Eastern Enterprises, Inc., v. Morris (PDF), 09-11184 (11th Cir. 2010), a Circuit Court of Appeals determined that a non-compete agreement that national tax preparation company H&R Block used for its Georgia employees was enforceable.
Here, former employee Vicki Morris worked as a seasonal tax preparer for the 2000 – 2005 tax seasons. Each year, Ms. Morris signed an employment agreement that contained a non-compete and non-solicitation clause. The employment agreement prohibited Ms. Morris from providing tax-related services to any H&R Block client that she had serviced within her work district or a 25-mile radius of her work office for a period of two years following her termination of employment.
After H&R Block terminated her employment in December 2005, Ms. Morris opened her own company and prepared tax returns for 87 former H&R Block clients, 47 of whom she had personally serviced. H&R Block filed the instant lawsuit against Ms. Morris.
Under Georgia law, courts consider several factors to determine if a non-compete agreement is reasonable: the duration of the restriction, the geographic scope, and the type of activity prohibited. Applying these factors to the H&R Block non-compete clause, the court found the duration (two years), geographic scope (work district or 25-mile radius), and type of activity prohibited (H&R Block clients she had serviced) to be reasonable. In particular, the court found that the prohibited activity was reasonable because it only prevented Ms. Morris from providing tax preparation services to the clients that she had previously serviced at H&R Block, and did not prohibit her from servicing other H&R Block clients or the general public. The court found that the non-compete agreement appropriately balanced Ms. Morris’s right to earn a living with H&R Block’s right to protect its client relationships.
While many states employ the same test as Georgia, they may have widely varying outcomes. For example, allowable non-compete durations may range from a maximum of six months to several years. Other states such as California generally prohibit non-compete agreements. Because the enforceability of non-compete agreements is state-specific, employers need to make sure the agreements are well drafted for each particular jurisdiction.