Recent Scrutiny of Non-Competes

Larry Del Rossi published an article for Today’s General Counsel titled, “Recent Scrutiny of Non-Competes.” Larry provides an overview of non-compete agreements (also known as restrictive covenants) and discusses a recent uptick in government activity that may regulate or challenge private businesses’ use and enforcement of non-competes.

Larry says “one major challenge for national companies is that enforcement of non-competes varies from state to state, so that there is no uniform standard.” In May 2016 the White House issued “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” a document intended to identify areas where implementation and enforcement of non-competes may present issues, put forward a set of best practices, and serve as a call to action for state reform.

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2016 Presidential Election Aftermath: What Can be Expected in the Labor & Employment Law Space

We continue to analyze and assess what the 2016 election results mean in the Labor & Employment Law space, and what we can expect from a GOP White House, House and Senate.  The last two times that this GOP alignment was present were 1929 and 2007 (let’s hope that the financial events that followed those two occasions – the Great Depression and the Great Recession – do not repeat themselves this time around).

It is difficult to predict what President Donald J. Trump’s actual agenda will be, because his campaign was long on broad concepts and very short on serious, detailed policy presentation. While Candidate Trump said many things, including contradictory things, about many topics, some themes can be discerned from pre-election and post-election comments.  Also, some issues have been on the GOP wish list for some time, but until they could have the alignment of White House and Congress that will be in place in January, those wish list items, as a practical matter, were just wishes.  Here are our impressions about what changes will occur.

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What Employers Need to Know about the Government’s Recent Scrutiny of Non-Competes

For more than 400 years, private businesses have used non-compete agreements in one form or another to protect their legitimate business interests, such as long-standing customer relationships, investment in specialized training, or development of trade secrets. They are commonplace in many employment contracts in a variety of industries ranging from retail, insurance, healthcare, financial services, technology, engineering, and life sciences.  Some state legislatures and courts have curtailed their use in certain industries or professions.  California, for example, prohibits them unless limited exceptions apply.  Cal. Bus. Code §16600.  Most states prohibit them for legal professionals.  Many courts can modify or “blue pencil” them if the restrictions are found to be broader than necessary to protect an employer’s legitimate business interests.

Historically, federal and state agencies have generally stayed out of the mix in terms of regulating or challenging private businesses’ use and enforcement of non-competes.  However, a recent uptick in government enforcement activity suggests a new wave of challenges is on the horizon for employers.

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Federal Court Orders Stop to DOL’s Persuader Rule

On June 27, 2016, a Texas federal court granted a preliminary injunction preventing the Department of Labor (DOL) from moving forward on a nationwide basis with the July 1st enforcement of its Final Rule Interpretation of the “Advice” Exemption to Section 203(c) of the Labor Management Reporting and Disclosure Act (LMRDA) (also known as the DOL’s “Persuader Rule”). The court order was based on findings that plaintiffs in the case of National Federation of Independent Business, et al. v. Perez, 5:16-cv-00066-C, were likely to succeed on the merits of their claims in establishing that the DOL’s Persuader Rule is inconsistent with federal law and exceeds the DOL’s statutory authority.

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The Defend Trade Secrets Act’s Seizure Provisions and What They Mean for Employers

By Valerie Dutton Kahn

It’s an employer’s worst nightmare: you discover that a former employee has stolen a company trade secret. You know you must act immediately to keep this extremely important and sensitive information from being disseminated or risk losing important intellectual property protection. However, protecting a misappropriated trade secret is very difficult, particularly in situations where the suspected misappropriator is unlikely to follow a court order.  Thankfully, the recently passed Defend Trade Secrets Act (“DTSA”) includes helpful seizure provisions an employer may use to recover and prevent dissemination of trade secrets from suspected misappropriators.

What Is The Defend Trade Secrets Act?

President Obama signed the DTSA into law on May 11, 2016.  This new law is effective immediately and provides a nation-wide civil cause of action for misappropriation of trade secrets. Although companies may still pursue trade secret litigation under state causes of action, the DTSA permits companies to prosecute their claims in federal court, thus allowing them to avoid the complexity and cost of pursuing trade secret claims in multiple jurisdictions simultaneously.

What Are The DTSA’s Seizure Provisions?

Significantly, the DTSA includes an ex parte seizure provision allowing “the seizure of property necessary to prevent the propagation or dissemination” of trade secrets, meaning the employer may seize property through court order  without providing notice to the other party.  See DTSA § 2(b)(2). To receive a court order allowing such seizure, the employer must:

• Allege specific facts showing that the suspected misappropriator would “evade, avoid, or otherwise not comply with” other extraordinary relief, such as a temporary restraining order, and would “destroy, move, hide, or otherwise make [the property to be seized] inaccessible to court” if notified of the seizure proceedings;

• Be able to show that the employer would suffer “immediate and irreparable injury” if the requested seizure were not occur, and that such injury would be greater than any to be suffered by the suspected misappropriator or any third parties if the seizure request is granted;

• Be able to show that the suspected misappropriator has actual possession of the trade secret and either misappropriated or conspired to use improper means to misappropriate that trade secret;

• Describe, with reasonable particularity and to the extent reasonable, what is to be seized and where it is located; and

• Not have publicized the requested seizure.

See id. § 2(b)(2)(A)(ii). Orders of seizure are executed by a Federal law enforcement officer.  The employer may not participate in the seizure, although the law enforcement officer may request to be accompanied by an unaffiliated technical expert.  Any materials seized will be held in court custody until a hearing can be held, although a motion to encrypt seized material may be made at any time.  See id. § 2(b)(B), (D), and (H).

What Does This Mean For Employers?

The good news is that now if a trade secret is misappropriated, employers may be able seize it and halt its dissemination before irreparable harm has occurred.  In our modern world where information can be copied and transported across state lines (or international boarders) in mere moments, this is very important. However, there are a number of cautions employers should be aware of:

• Seizure under the DTSA is extraordinary relief only. The DTSA’s drafters contemplated it would be used in instances such as when “a defendant is seeking to flee the country or planning to disclose the trade secret to a third party immediately or not otherwise amendable to…the court’s orders.” Rep. No. 114-220 at 9 (2016).  Accordingly, seizure will be permitted only in the most extreme situations.

• The DTSA requires an employer seeking seizure to provide security “determined adequate by the court for the payment of the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure.” DTSA 2(b)(B)(vi). This security will not act as a cap on damages if it is later determined that property was wrongfully seized.

• The DTSA’s drafters struggled with handling misappropriated trade secrets contained in electronic files. If, for example, an employee downloaded files containing trade secrets from her company computer onto a flash drive, the court could seize that flash drive. The situation becomes more murky, however, when an employee transmits files containing trade secrets to himself via his personal email (thus leaving a copy on the server of the email provider), or uploads company files to a third party cloud service. In order to protect these unintended recipients, the DTSA’s drafters included carve outs prohibiting seizure from innocent third parties (although injunctions prohibiting disclosure are permitted).  Accordingly, until the employer can obtain other relief, the trade secret will remain on the third party’s server, potentially vulnerable to misappropriation from bad actors engaged in cyberespionage.

On balance, the DTSA is a helpful piece of legislation that will greatly assist employers in protecting trade secrets under certain circumstances. However, as with any new piece of legislation, it is unclear how these provisions, particularly those concerning electronic information, will be applied in practice.

If you would like to discuss best practices for keeping trade secrets secure or need help dealing with potentially misappropriated trade secrets, please contact the author or any member of our Labor and Employment Practice Group.

A Notable Week Indeed – From OSHA to Trade Secrets to ADA Accommodations and Transgender Rights!

By Kelly Petrocelli

It’s been a busy and, let’s say notable, week in the area of employment law. Here’s a quick recap, with more to come in future posts, of what you may have missed if you were focused elsewhere this week.

First, OSHA published a new injury Rule this week. While it does not take effect until January 1, 2017, employers should not wait until then to begin thinking about what changes may be necessary to ensure full compliance in the new year. The rule changes create a new cause of action for employees if they suffer retaliation for reporting a workplace injury, and employers are expected to ensure that policies addressing safety do not discourage employees from reporting such injuries. Large employers will also have some additional reporting requirements to OSHA. And, significantly, and in line with the current administration’s agenda of transparency, OSHA will begin making injury data accessible to the public, after removing any personally identifiable information regarding employees. That’s just a summary, with more to come in a future blog post. Stay tuned.

Second, did you hear that President Obama signed into law the Defend Trade Secret Act of 2016? Yes, that’s right, claims for trade secret misappropriation are not just limited to what the applicable state law provides. The new law creates a federal cause of action for the theft/misappropriation of trade secrets that are “related to a product or service used in, or intended for use in, interstate or foreign commerce.” The law also creates a new mechanism for a court to order the civil seizure of property, ex parte, if an employer can meet certain stringent standards for such an order.

Third, not to be overshadowed by either the President or OSHA, the EEOC published its own resource document this week regarding employer duties to provide leave as a reasonable accommodations in the workplace. While the new resource tracks what the EEOC has been saying for many years (or what we, as employment attorneys, know from tracking EEOC litigation and publications), the new resource delves a little deeper into how employers should be analyzing an employee’s request for leave and may be a helpful resource for employers who may still be under the mistaken impression that simply applying a leave policy (or workplace rule) the same to everyone is acceptable under the ADA (hint: we know that employers must modify policies for individuals with a disability if doing so could be a form of reasonable accommodation). Our mantra of no more “automatic termination” policies can no longer be ignored. This is serious stuff. Lots more to come on this topic.

Fourth, the EEOC was also busy issuing a new fact sheet on bathroom access for transgender employees. The fact sheet is brief, essentially reciting the few decisions issued on the topic, and reiterating for employers that transgender employees must be permitted to use the bathroom that corresponds with their gender identity (not biological sex) and cannot be conditioned on an employee having undergone reassignment surgery. Also, employers beware, providing a separate, single-user bathroom for a transgender employee is a form of discrimination (although you can provide a single-user bathroom for use by all employees). A transgender employee must have equal access to the common bathroom that corresponds with their gender identity, regardless of whether it makes other employees uncomfortable.

These are just a few of the many things that happened this week. Stay tuned for further analysis on these topics and more (including the much-anticipated DOL overtime regulations that could be published as early as next week).