We recently shared a California federal court decision in Barker v. Insight Global, LLC, et al. that relied on Section 16600 of California’s Business and Professional Code to hold that, in California, non-solicitation provisions in employee agreements are presumptively invalid. The California statute governing restrictive covenants provides that “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void,” Cal. Bus. & Prof. Code §16600. But it does not expressly provide conditions under which a restrictive covenant would be enforceable against an employee. This has left the statute vulnerable to the kind of judicial interpretation seen in Barker, in which the “reasonableness” standard, applied to non-solicitation provisions for decades, was rejected in lieu of an invalidity presumption.

The good news for employers, however, is that many states outside California within the Ninth Circuit have express statutory provisions permitting restrictive covenants under certain conditions as outlined in the survey below:

State
State governing restrictive covenants
Statute explicitly allows restrictive covenants in employment agreements under the following conditions:
Hawaii Haw. Rev. Stat. §480-4
  • Does not have the effect of substantially lessening competition or tend to create a monopoly in any line of commerce in any section of the State.
  • Consists of an agreement not to use the employer/principal’s trade secrets for a reasonable time.
Idaho Idaho Code §§44-2701 to 2704
  • Limited to “key” employees or independent contractors.
  • Protects the employer’s legitimate business interest.
  • Reasonable in duration, geographical area, and based on the type of employment/line of business.
  • Does not impose a greater restraint than reasonably necessary.
Nevada Nev. Rev. Stat. §§613.195-613.200
  • Supported by valuable consideration.
  • The restraint is not greater than required for employer’s protection.
  • Does not impose undue hardship on the employee.
  • If the result of a termination, employer must pay the employee’s full compensation for the entire restricted period.
Oregon Or. Rev. Stat. §653.295
  • Duration is 18 months or less.
  • Employer provides compensation for the entire restricted period equal to the greater of either (1) 50% of employee’s gross base salary and commissions or (2) 50% of the U.S. Census Bureau median income for a family of four.
  • Includes a notice requirement.
Washington Wash. Rev. Code Ann. § 49.44.190
  • Permitted unless employee is terminated without just cause or laid off.
  • Applies to broadcasting industry only.

Where state statutes are silent on restrictive covenants or do not provide express carve-outs for enforcement, employers and employees have less certainty and remain more vulnerable to shifting judicial interpretations of these provisions.

The Federal Reserve is prepared to ratchet up the penalty for bankers caught misappropriating their employer’s trade secrets. Although bankers were already subject to civil liability under state laws governing trade secrets and breach of contract, the Federal Reserve now appears willing to subject guilty bankers to an outright ban from working with any institution specified in 12 U.S.C. § 1818(e)(7)(a), pursuant to section 8(e) of the Federal Deposit Insurance Act.

Two Wyoming bankers are seemingly harbingers of this newfound willingness by the Federal Reserve to ban bankers caught misappropriating an employer’s trade secrets. The two culprits misappropriated Central Bank & Trust’s (“Central”) proprietary business information in connection with their plan to acquire employment and an ownership interest in Farmers State Bank (“Farmers”). The bankers’ malpractice included dissuading Central from pursuing an opportunity they conspired to exploit once at Farmers, moving loans from Central to Farmers, and the sharing of other proprietary (non-customer) information with Farmers’ employees. Although a Wyoming state judge ruled against the bankers last April, they retained their new jobs; this apparently irked the Board of Governors. In seeking to ban the bankers, the Federal Reserve alleged unsafe or unsound banking practices, as well as breaches of fiduciary duty. If banned, the duo will likely struggle to make good on their court-ordered $2.2 million civil judgment.

Whether the Federal Reserve is instituting a policy change regarding enforcement of trade secrets law or is merely punishing an instance of exceptionally brazen illicit behavior is still unclear. That said, aggrieved banks certainly have another arrow in their quiver when confronting unscrupulous ex-employees. Regardless, any employee should proceed with extreme care when handling an employer’s confidential and proprietary business information.

The case is In the Matter of Frank E. Smith and Mark A. Kiolbasa, Docket No. 18-036-E-I, before the Board of Governors of the Federal Reserve System.

In a recent decision, the Supreme Court of Vermont affirmed its commitment to protecting commercial secrets of private companies, even if they may have been disclosed to a public agency. Long v. City of Burlington, 199 A.3d 542 (Vt. 2018). The Burlington City Council was working with its consultant, ECONorthwest, and private property owners Devonwood Investors, LLC and BTC Mall Associates LLC (collectively BTC) to redevelop several downtown city blocks. The parties entered into a Predevelopment Agreement that required BTC to provide the City with market studies and feasibility analyses, but also acknowledged that this information, if disclosed to BTC’s competitors, could harm BTC’s business. Therefore, when BTC provided its studies to the City, it redacted any commercially competitive information. But because BTC and ECONorthwest had also entered into a nondisclosure agreement, BTC provided ECONorthwest with unredacted copies. Plaintiff filed suit alleging that the City violated the Vermont Public Records Act by failing to disclose the unredacted study its consultant had received. The trial court dismissed the case, holding that the study was not a public record, and even if the study was a public record, the redacted information was exempt from disclosure as a trade secret.

On appeal, the Court assumed without deciding that the unredacted study was a public record, and focused solely on the trade secret question. The Public Records Act exempts from disclosure “trade secrets” defined as “confidential business records or information, including any … plan, … production data, or compilation of information which is not patented, which a commercial concern makes efforts that are reasonable under the circumstances to keep secret, and which gives its user or owner an opportunity to obtain business advantage over competitors who do not know it or use it.” Vt. Stat. Ann. tit. 1, § 317(c)(9) (2018). Relying on an earlier Supreme Court of Vermont decision, the Court explained that the plain language of the exemption, specifically the inclusion of “compilation of information,” indicated that the Vermont Legislature did not intend to limit the definition of trade secrets to just information in the nature of intellectual property. See Springfield Terminal Railway Company v. Agency of Transportation, 816 A.2d 448 (Vt. 2002). Here, the private corporate information at issue would give its possessor a commercial advantage. Furthermore, BTC made a reasonable effort to keep such information secret by requiring ECONorthwest to sign a nondisclosure agreement. BTC’s information therefore met the definition of a trade secret and was exempt from disclosure.

Any other finding under the Public Records Act would have led to absurd results. The exemption “promotes not only the private company’s interest in protecting its commercial secrets, but also the government’s interest in its continuing ability to secure such data on a cooperative basis … to make intelligent, well-informed decisions.” 199 A.3d at 550. The Court’s decision should provide comfort to private companies that their commercial secrets are safe from disclosure when contracting with the government.

Despite continued trade talks with China, the federal government continues to aggressively pursue efforts to prevent and hold Chinese companies accountable for trade secret theft and economic espionage. As described below, in the last month alone, the U.S. Government has taken three very decisive actions in combating the threat.

  1. The Senate Judiciary Subcommittee announced the creation of a subcommittee on Intellectual Property. The subcommittee will focus, among other intellectual property matters, on the theft of trade secrets by state supported actors such as China. According to Chris Coons (Ranking Member of the subcommittee), one of the major challenges for the U.S.’s intellectual property system in recent years is “rampant theft from state actors like China,” which among other issues is “causing our nation’s economy to lose billions of dollars annually and threaten our country’s long-term technological dominance.”
  2. Lawmakers continue to scrutinize Huawei, which was charged with stealing trade secrets from T-Mobile. Two members of the new IP subcommittee, John Cornyn and Ben Sasse, joined several other senators  in sending a letter to the U.S. Departments of Energy and Homeland Security, expressing “concern over the national security threat” posed by Huawei solar inverters to U.S. electrical systems and infrastructure. The senators believe that due to the vulnerability of American energy systems to cyberattacks, the federal government should “consider a ban on the use of Huawei inverters in the United States and work with state and local regulators to raise awareness and mitigate potential threats.” This is in addition to Congress’s recent ban of Huawei from the U.S. telecommunications equipment market due to concerns with the company’s links to China’s intelligence services.
  3. Earlier this month, two individuals, Xiaorong You and Liu Xiangchen, were indicted for conspiracy to steal trade secrets worth more than $119 million. The indictment alleges that You stole trade secrets relating to BPA-free coatings for beverage cans from two American companies where she was employed. You allegedly conspired to provide stolen information to a Chinese company, in exchange for payment, and an ownership stake in a new Chinese company that would own and use the trade secrets. Liu also allegedly agreed to help You obtain awards sponsored by the Chinese government to “induce individuals with advanced technical education, training, and experience residing in Western countries to return or move to China and use their expertise to promote China’s economic and technological development.” You is alleged to have carried out the conspiracy through numerous overt acts. These include photographing trade secrets on one employer’s computer screen, photographing equipment in her other employer’s secure and restricted laboratories, and transferring the stolen trade secrets from both companies to an external hard drive and her Google Drive account.

These preemptive and enforcement actions by Congress and the Department of Justice are indicative of the U.S.’s continually increasing efforts to protect the trade secrets of American companies from overseas threats, namely China.

In West Virginia, legislators are moving forward a bill that would criminalize trade secret theft. On February 26th 2019, the West Virginia House of Delegates passed H.B. 2014 with a 98-1 approval that would create criminal penalties for stealing trade secret or other intellectual property. The bill is now headed to the West Virginia Senate where President Mitch Carmichael has already indicated he approves and plans to move it forward. Legislators are hoping to drive tech and corporate investment in West Virginia by imposing more stringent protections for trade secrets and according to Senate President Carmichael, “[t]his bill would make sure [these companies] are protected” from intellectual property theft. If passed, the bill would apply to violations occurring after July 1st and could make West Virginia an attractive forum for companies looking to protect valuable intellectual property assets.

The Federal Circuit has revived a complaint to correct inventorship in another case involving the intersection of patent and trade secret law. In Coda Development v. Goodyear Tire & Rubber, Plaintiffs asserted that Defendants misappropriated trade secrets and breached a non-disclosure agreement (NDA) by seeking patent protection for Plaintiff’s inventions related to self-inflating tire (SIT) technology. The district court dismissed the case on a Rule 12(b) motion. But the Federal Circuit reversed holding that the district court improperly made underlying factual findings on the inventorship issue at the pleading stage.

Click here to read the full version of this alert, authored by Crowell & Moring Partner Mark Klapow, Partner Anne Li, and Associate Siri Rao.

Crowell & Moring has issued its fifth annual report on regulatory trends for in-house counsel. “Regulatory Forecast 2019: What Corporate Counsel Need to Know for the Coming Year” explores a diverse range of regulatory developments coming out of Washington and other leading regulatory centers of power, and it takes a deep dive into international trade—examining the challenges and opportunities that will arise in the year ahead as global businesses compete in the digital revolution and operate their businesses across borders.

The cover story examines how changing international trade policies are causing businesses to rethink strategies for everything from supply chains to data transfers, while uncovering new opportunities along the way. The article forecasts changes on the horizon that include how new tariffs and trade barriers may drive up costs and cause companies to rearrange their supply chains; how some countries are restricting the flow of data across borders; and the impact of the growing number of stronger enforcement of financial crimes regulations, among others. The article also identifies hot spots for 2019 in an international trade infographic. An additional international trade article examines the increased oversight on foreign investment in the U.S., and its impact on innovation.

The Forecast also explores how the pace of technological change has revolutionized commerce and industry, and those charged with developing and enforcing regulations are working to keep up. The government affairs article, “Congressional Influence on Rulemaking Is on the Rise,” examines how congressional input on rulemaking is increasing as the Trump administration pursues deregulation, while the energy article, “Electricity—Prepare for Continuous Disruption,” focuses on how the digital transformation is bringing extraordinary risks and opportunities to incumbent utilities, competitive suppliers, and consumers.

Be sure to follow the conversation on social media with #RegulatoryForecast.

In an aggressive first move, Plaintiffs – two former employees accused of trade secret misappropriation – filed a preemptive suit for declaratory relief and unfair business practices against their former employer, Defendant Chandler Holding’s, Inc., in California Superior Court. Plaintiffs contend that shortly after their resignations from Chandler Holdings, Inc., they received letters from Defendant’s counsel accusing them of “numerous wrongful, illegal, fraudulent and contract breaching actions.” The letters allege that Plaintiffs are wrongfully competing against Defendant and are violating the California Uniform Trade Secrets Act, Economic Espionage Act of 1996 and Securities Exchange Act.

Plaintiffs resigned from their positions on February 1, 2019. They returned the notebook computers issued to them by Defendant. Shortly thereafter, Plaintiffs received the letters described above, which further suggest that Plaintiffs: “(1) solicited employees of Chandler, (2) solicited customers and other “business” relationships of Chandler, and (3) accessed, appropriated, and used Chandler’s property, including trade secrets and confidential information.”

Plaintiffs maintain that they did not take any confidential or proprietary information when they left. They argue that the allegations in Defendant’s letters are unsubstantiated and meritless and that the letters are intended to harass, intimidate, and restrain them from pursuing their livelihood. In addition to seeking declaratory relief to preempt such claims, Plaintiffs also allege that Defendants engaged in unfair business practices. Specifically, Defendants’ actions violated Business and Professions Code § 17200 when, in their letters, Defendant alleged that Plaintiffs were “wrongfully competing against Chandler based on their new employment with their new employer.” Plaintiffs contend that there is no valid or enforceable non-compete between Plaintiffs and Defendant and any employer is free to employ Plaintiffs.

The Complaint was filed on February 15, 2019. We will follow this case closely and report back on how Defendant responds.

Applying the trade secret label to diversity initiatives is growing in popularity in recent years.

This issue has arisen in the context of public records requests, as companies with government contracts are subject to the Labor Department’s anti-discrimination arm and are required to provide diversity information in the form of EEO-1 reports. Several companies have argued that detailed, government mandated figures on the number of women and people of color they employ is not only confidential but warrants trade secret protection because releasing these numbers to the public would give rival competitors an opportunity to steal the company’s hiring initiatives, recruit its diverse employees away, or be used against it in litigation. Some people have pushed back on this effort, arguing that this is nothing more than a new tactic for companies “to hide gender and race disparities and interfere with the advancement of civil rights law and workplace equity.”

This argument has also arisen in the context of more traditional employment disputes. As discussed in an earlier blog post on this issue, just last year, IBM sued its former chief diversity officer on the basis that she would take confidential data on its diversity initiatives and strategies with her to Microsoft. This case was ultimately settled out of court, meaning courts have yet to weigh in on this issue. Time will tell whether this argument will survive court scrutiny.

Please join us for a Crowell & Moring webinar, “New Year, New Look at the Enforceability of Employee No-Solicitation Agreements – State Law Developments,” scheduled to take place on February 28th, 2019 at 12:00 pm Eastern.

Employers frequently enter into restrictive covenants with their employees, including those that prohibit former employees from recruiting other employees away from their current employment. These agreements are intended to protect the employer’s intellectual property, trade secrets and other business interests. They have generally been viewed by employers and courts as routinely enforceable. However, recent state law developments, including recent decisions in California and Wisconsin, suggest that these restrictions may face additional scrutiny from increasingly skeptical courts. These decisions may require further review of current restrictive covenants.

During this webinar, we will discuss the recent developments regarding employee solicitation restrictions in California, Wisconsin, and other states. We will then address best practices with respect to such agreements.

Crowell & Moring panelists include Partner Tom Gies, Senior Counsel Andrew Bagley, Counsel Christine Hawes, and Counsel Suzanne Rode.

We hope that you can join us and participate in a lively discussion of these issues.

Please click here to register.