Non-Competes Depart the Federal Scene in the New Administration

By Cody S. Lonning and Douglas B. Mishkin on

The past two years have marked a seemingly volatile time for non-compete law in the United States, traditionally a state issue. National political forces—the United States Department of the Treasury, the White House, and Senators Al Franken and Chris Murphy—showed an interest in attempting to limit the enforceability of non-competes. We have previously covered this shift here and here. But in 2017, that federal tide has turned with the arrival of the Trump administration.

Regulating non-competes has long been exclusively the domain of the states. But in 2015, Senators Al Franken and Chris Murphy introduced a bill to limit the use of non-competes in contracts with low-wage workers. In March 2016, the Department of the Treasury’s Office of Economic Policy issued a report titled “Non-compete Contracts: Economic Effects and Policy Implications.” It concluded that non-competes are harmful to the broader economy. Two months later, the Obama White House released a “Call to Action” encouraging states to reform and limit non-compete agreements. Continue Reading

Foolishness and the Well-Paved Road to Sanctions

By Emily M. Tortora and Douglas B. Mishkin on

We’ve previously explained the foolishness of trying to destroy or alter electronically stored information that qualifies as evidence in litigation. Why foolish?  Because the attempt implies a belief that such misconduct won’t be detected. When scrutinized by the right experts, the attempt will be detected; when properly presented to a court, it likely will be sanctioned.

Take the recent case of Organik Kimya, San. ve Tic., A.S. v. ITC, an appeal from the U.S. International Trade Commission to the U.S. Court of Appeals for the Federal Circuit. The Dow Chemical Company (“Dow”) claimed that former Dow employees assisted Organik Kimya San. ve Tic., A.S. (“Organik”) in misappropriating Dow’s trade secrets to develop competing paint additives. Once Organik received the complaint, the foolishness began.

After the judge permitted Dow to inspect a certain laptop, Organik “began overwriting the laptop’s hard drive by copying the Program Files folder at least 108 times.”  This looks like an effort to occupy any available space on the hard drive and thus purge remnants of deleted files. It certainly leads to the question:  Why would someone do such a thing?  Under these circumstances, there is no good reason. This was an obvious, clumsy attempt to delete files and make them unrecoverable days before a court-ordered forensic examination. Continue Reading

To Plead or Not to Plead? That Is the (State or Federal) Question

By Enia Titova and Douglas B. Mishkin on

Well, that didn’t take long! Not even a full year after President Obama signed the Defend Trade Secrets Act into law on May 11, 2016, Judge Edward G. Smith of the United States District Court for the Eastern District of Pennsylvania entered judgment for plaintiff on the first DTSA claim to be litigated to a jury verdict.

To be fair, the case was already in progress when DTSA became law, so plaintiff Dalmatia Import Group, Inc. amended its complaint to add the claim to its existing state law trade secret claims. The jury awarded Dalmatia $500,000 on both its federal and state trade secret misappropriation claims.

That’s when things got interesting. Defendants argued that because the jury was never instructed on the differences between the federal and state statutes – most importantly that damages were not available under the federal statute prior to its May 2016 enactment – the court should decline to enter judgment on a verdict that did not clearly apportion damages between the state and federal claims.

Ultimately, the court sided with the plaintiff. But the dispute raised an interesting question: Now that both federal and state claims are available in most jurisdictions, can you and should you plead both? In California, where I practice, the answer is not all that straightforward.

Continue Reading

“Mining for Metadata”: Will You Strike Gold or Strike Out?

By Karel Mazanec and Douglas B. Mishkin on

cybersecurity

You might have heard about “mining for metadata.”  What does it mean?  How is it done?  Should you do it?

When the origins of a critical document are at issue, you know to examine that document’s metadata. “Mining for metadata” is something else. It’s the process of using software to systematically search through the metadata embedded in a collection of documents. Since metadata sometimes can determine or affect the outcome of a case, it’s important to know how and when you may mine an opponent’s metadata, and how you can protect yourself from those who may want to mine yours.  Continue Reading

Metadata Catches Another Employee in the Act

By Douglas B. Mishkin on

MetadataEmployees continue to believe that they can outsmart their electronic storage devices and the metadata of the files on those devices – and they continue to be wrong.

In Engility Corporation v. Daniels, the trial court entered a preliminary injunction against two former employee-defendants, largely because the court did not believe their assertions that they no longer possessed trade secrets belonging to their former employer, the plaintiff. Click here for the Order Granting Preliminary Injunction in Part.

Daniels’ attempted explanation is a bit convoluted and hard to summarize quickly. To get the full flavor, you should read the judge’s summary of it. But there are two components to that attempted explanation that bear directly on points I raised in my previous blogs on the use of metadata and electronic storage devices in proving or defending against claims of theft of trade secrets. Continue Reading

New York Appellate Court Declines To Enforce Non-Compete Agreement Against Employees Terminated Without Cause

By Douglas B. Mishkin and Benjamin E. Stockman on

NY_SkylineIt should come as little surprise to employers that the New York courts take a skeptical view of non-compete agreements between employers and employees. Consistent with this view, a New York State appellate court recently confirmed what many, including prior authors of this blog, already understood: in New York, any employer who terminates an employee without cause risks losing the ability to enforce a non-compete agreement against the employee.

The recent decision, Buchanan Capital Mkts., LLC v. DeLucca, et al., 41 N.Y.S.3d 229 (1st Dept. 2016), came on appeal by a financial compliance consultancy (employer) seeking an injunction to enforce non-compete agreements against former employees who solicited business from the employer’s entire client list soon after leaving employment. The employees did so despite non-solicitation provisions within the non-compete agreements prohibiting the client solicitation. Continue Reading

When Your Contractor Isn’t a Contractor and Your Non-compete Isn’t Enforceable

By Douglas B. Mishkin and Christopher R. Williams on

business-962364You hire an independent contractor and include a non-competition clause in the independent contractor agreement. You figure that, even if somehow a court later concludes this person is an employee, at least you still have the protection of the non-compete. So imagine your disappointment when you learn that your contractor actually was your employee and the non-compete clause is unenforceable. That is what happened to an employer in a recent Virginia case, and the trial court’s decision provides a warning to be heeded by all employers. Reading & Language Learning Ctr. v. Sturgill, Circuit Court of Fairfax County, Virginia, August 4, 2016, Case No. CL-2015-10699.

Charlotte Sturgill was training to be a speech therapist but needed a supervised clinical fellowship to obtain certification. She entered into an agreement with the Reading & Language Learning Center (RLLC) to work as an independent contractor for a year to obtain her license. In the contract, the parties agreed not to “employ any contracted employee or contract with any current client of the Other for a period of two years.”

After one year, Sturgill left RLLC for employment as a full-time therapist for Ingenuity Prep, a local charter school. RLLC had provided services to Ingenuity as a subcontractor of yet another business. RLLC sued Sturgill in Circuit Court for Fairfax County, alleging that she had breached her non-compete agreement by accepting employment at Ingenuity Prep.

The Court ruled in favor of Sturgill for several reasons worthy of attention. First, the trial court ruled that the non-compete was unenforceable as written because it failed the “janitor” test – it would have prohibited Sturgill from working “in any capacity” for a competitor, even in a position as different from hers as a janitor. A non-compete that prohibits an employee from working “in any capacity” for a competitor will be deemed overbroad unless the employer can show a legitimate business interest for such a broad restriction. Ordinarily, you should explicitly state that the person is prohibited from doing for a competitor what the person did for you. The Court rejected RLLC’s argument that the parties “understood” that “in any capacity” actually was limited to what Sturgill had done for RLLC, because Virginia will not “blue pencil” a restrictive covenant.

Next, the Court found that, even if the non-compete were enforceable, Sturgill did not breach it because of the particular language that RLLC used: “RLLC and the Consultant agree not to employ any contracted employee or contract with any current client of the Other” (emphasis in Court’s opinion). The Court reasoned that this employ/contract distinction, strictly speaking, meant that Sturgill was prohibited only from being an independent contractor for Ingenuity Prep, not from being its employee. Had RLLC meant to prohibit her from being employed by Ingenuity Prep, it would have repeated the term “employ” rather than switch to “contract.” The Court rejected RLLC’s argument that others had understood the purported restriction of the non-compete in the past.

Finally, the Court found RLLC misclassified Sturgill as an independent contractor when in fact she had been its employee. Because Sturgill was unlicensed, RLLC directly supervised her work. RLLC told her what schools to visit and how many students to see each week, and ultimately approved her schedule. She “met frequently with her supervisors to discuss treatment plans,” and her supervisors gave final approval to her reports and hours worked.

Interestingly, the Court went on to rule that RLLC’s misclassification of Sturgill meant that their agreement violated public policy because of the various ripple effects under Virginia and federal law, principally the employer’s failure to pay various employment-related taxes, and therefore was void. Perhaps the Court was implying that this was an additional basis on which to negate the non-compete.

What are the lessons to be learned?

*          Employers must take care to avoid creating the impression that their restrictive covenants are mere templates that are replicated from one employee to the next. Different employees do different jobs; employers may have at least slightly different legitimate business interests in restricting those employees post-employment. In this case, the Court appeared puzzled that RLLC’s agreement with Sturgill contained the same non-compete language as RLLC’s agreement with a subcontractor: “Either as a matter of pure coincidence or through the sharing of information, the restrictive covenant in [RLLC’s subcontract] contained the same language” as the non-compete with Sturgill. The point is that employer-employee and contractor-subcontractor relationships are inherently different. It looked strange to the Court to see similar restrictive language in two different kinds of agreements.

*          Employers should periodically review their non-competes to ensure continued compliance with evolving standards of enforceability. The Court noted that RLLC had used the same language in its non-compete provisions with many employees and contractors over the past decade.

*          Language matters. The Court found it odd that RLLC called Sturgill a “consultant” in one provision, but an “independent contractor” in another. The terms are not mutually exclusive, but the difference may have raised a judicial eyebrow, in that this appeared to be language that was merely copied from another agreement. Similarly, the employ/contract language noted above prompted the Court to infer that RLLC had intended different things by using different words, which in turn led the Court to conclude that RLLC’s agreement might have prohibited Sturgill from contracting with Ingenuity Prep (i.e., being an independent contractor), but it did not prohibit her from being employed by Ingenuity Prep.

Employers understandably cannot reinvent the non-compete wheel with every new employment contract. Nor can they simply clone the most recent restrictive covenant from another employee’s agreement without ensuring that the terms of restriction are suited to the particular circumstances of the particular employee. Proving that particularity will be essential when the time comes to ask a judge for an injunction against that employee.

New York Employers’ Use of Non-Competes in Jeopardy?

By Brian J. Turoff on

NY_Skyline

New York Attorney General Eric Schneiderman has promised to introduce a bill that would restrict New York employers’ use of non-compete agreements for certain non-highly-compensated employees. The proposed legislation would (i) ban the use of non-competes for employees who earn less than $900 per week; (ii) require employers to pay additional monetary consideration in exchange for an employee entering into a non-compete agreement; (iii) limit the duration and substantive scope of such agreements; and (iv) create a private right of action for violations of the prospective new law. In anticipation of these potential changes, employers must carefully consider the necessity of requiring certain employees to enter into non-compete agreements, and closely review their current agreements to ensure that they are only as expansive as necessary to protect their lawful interests.

Trade Secrets and the 2016 FOIA Improvement Act

By Douglas C. Proxmire on

united-states-capitol-buildingLast summer, Congress passed and President Obama signed into law the FOIA Improvement Act of 2016 (Public Law No. 114-185), which adds to and amends the Freedom of Information Act (FOIA). The stated purpose of the amendments to the FOIA is to create a “presumption of openness” limiting the federal government’s discretionary power to withhold requested information only when disclosure would result in “foreseeable harm.” For those that transact business with or even simply communicate with the government (referred to as “submitters” in FOIA parlance), the FOIA changes mean that submitters such as government contractors and grant recipients must proactively respond when a FOIA request potentially targets confidential and/or proprietary data that has been shared with the government.

Importantly, the 2016 FOIA improvement Act did not change FOIA Exemption 4, which protects from disclosure “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential.” Under Exemption 4, the government is prohibited from disclosing trade secrets or other proprietary/confidential information that any submitter has shared with the government. Unlike with some of the other FOIA exemptions, in their interpretation of Exemption 4, Courts have determined that the government lacks any discretion to disclose trade secret or commercial confidential/proprietary information in response to a FOIA request.

The 2016 FOIA Improvement Act was passed to accelerate the FOIA process and to compel government FOIA officials to provide as much information as soon as possible in response to a FOIA request. Specifically, the Act now imposes a penalty (i.e., the waiver of the statutory FOIA fees) on the agency for failing to provide a timely FOIA response. The Act also requires that the FOIA response segregate exempt information from releasable information in the same document, as an agency can no longer simply refuse to produce any document containing exempt information. In addition, the Act requires the agency to produce electronic copies of documents/data, which can be instantly disseminated by the requesting party, rather than paper documents, in response to a FOIA request. Furthermore, the Act requires the creation of a federal government FOIA portal that allows the same FOIA request to be simultaneously submitted to multiple agencies. As a result, submitters must be poised to respond immediately as soon as the government provides notice that a FOIA request seeks disclosure of the submitter’s data and/or documents.

As an initial step, whenever any person or entity first shares information/data with the government that it does not want disclosed to any third party, the title page and each subsequent page of the confidential document or data should be plainly marked as containing “confidential and proprietary information which is exempt from disclosure under FOIA.” Next, when the agency contacts the submitter (as FOIA requires) to tell them that a request seeks the disclosure of their information, the submitter should promptly respond by identifying: 1) the specific information within each responsive document that is exempt from disclosure, 2) the particular FOIA exemption (there are nine) that prohibits disclosure (as stated above, Exemption 4 protects trade secrets and confidential/proprietary data), and 3) why that exemption applies to each identified section of data/information that the submitter seeks to protect. Also, the submitter (or submitter’s counsel) should attempt to maintain an open dialogue with the assigned agency FOIA official throughout the FOIA process to promptly address and resolve any disagreements about what should and should not be disclosed before the agency takes a final disclosure position, which is often difficult to unwind. Finally, the submitter must be ready to assert a “reverse FOIA” action to prevent the disclosure of trade secrets or other confidential/proprietary information in the event that the agency disregards the submitter’s exemption recommendations before the agency releases the submitter’s trade secrets and confidential information in response to a FOIA request.

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