States within the Fourth Circuit vary in their enforcement of restrictive covenants. Virginia, Maryland, and South Carolina govern the use of restrictive covenants through common law while North Carolina governs through statute. Despite the variations in governing authority, many of the factors used in these states will be familiar, given the widely accepted “reasonableness” standard many jurisdictions have adopted as a metric for adjudicating the propriety of such agreements.

State
Law Governing Restrictive Covenants
Requirements for Enforcement of Restrictive Covenants
Virginia

Common Law – “Virginia, restrictive covenants, such as non-compete clauses and non-solicitation clauses, are enforceable if they are reasonable.” MicroStrategy Inc. v. Bus. Objects, S.A., 233 F. Supp. 2d 789, 794 (E.D. Va. 2002), aff’d in part, rev’d in part and remanded, 429 F.3d 1344 (Fed. Cir. 2005); Foti v. Cook, 220 Va. 800, 805, 263 S.E.2d 430, 433 (1980)

 

Employer bears the burden of proof in establishing its reasonableness of the non-compete agreement.

In determining whether an employer has carried that burden, Virginia courts focus on three factors:

(1) the duration of the restraint;

(2) the geographic scope of the restraint; and

(3) the scope and extent of the activity being restricted.

These three factors are considered together rather than separately and the clear overbreadth of any factor can defeat the enforceability of the provision, even if the other factors are narrowly drawn.

Upheld only when employees are prohibited from competing directly with the former employer.

Maryland

Common Law – Covenants not to compete may be applied and enforced generally “only against those employees who provide unique services, or to prevent the future misuse of trade secrets, routes or lists of clients, or solicitation of customers.”

Ecology Servs., Inc. v. Clym Envtl. Servs., LLC, 181 Md. App. 1, 14, 952 A.2d 999, 1006 (2008)

 

The court determines whether the restrictive covenant is reasonable in scope, both in terms of geography and duration, in the context of the employer’s business.

Next, the courts then consider the various factors in determining reasonableness:

(1) person sought to be enjoined is an unskilled worker whose services are not unique;

(2) whether the covenant is necessary to prevent the solicitation of customers or the use of trade secrets, assigned routes, or private customer lists;

(3) whether there is any exploitation of personal contacts between the employee and customer; and

(4) whether enforcement of the clause would impose an undue hardship on the employee or disregard the interests of the public.

The general rule in Maryland is that if a restrictive covenant in an employment contract is supported by adequate consideration and is ancillary to the employment contract, an employee’s agreement not to compete with his employer upon leaving the employment will be upheld ‘if the restraint is confined within limits which are no wider as to area and duration than are reasonably necessary for the protection of the business of the employer and do not impose undue hardship on the employee or disregard the interests of the public.

North Carolina

No contract or agreement hereafter made, limiting the rights of any person to do business anywhere in the State of North Carolina shall be enforceable unless such agreement is in writing duly signed by the party who agrees not to enter into any such business within such territory:

N.C. Gen. Stat. Ann. § 75-4

Restrictive covenants between an employer and employee are valid and enforceable if they are:

(1) in writing;

(2) made part of a contract of employment;

(3) based on valuable consideration;

(4) reasonable both as to time and territory; and

(5) not against public policy.

Restriction covenants are upheld when it is “directed at protecting a legitimate business interest” and areas where Plaintiff has connections or personal knowledge of customers.

Can enforce a restriction prohibiting a former employee from soliciting customers or clients.

South Carolina

“[A]greements not to compete, while looked upon with disfavor, critically examined, and construed against any employer, will be upheld as enforceable if such agreement is reasonable as to territorial extent of the restraint and the period for which the said restraint is to be imposed.” Team IA, Inc. v. Lucas, 395 S.C. 237, 245, 717 S.E.2d 103, 107 (Ct. App. 2011)

 

A covenant not to compete will be upheld only if it is:

(1) necessary for the protection of the legitimate interest of the employer;

(2) reasonably limited in its operation with respect to time and place;

(3) not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood;

(4) reasonable from the standpoint of sound public policy; and

(5) supported by valuable consideration.

Restrictive covenants are enforced when preventing disclosure or divulging of a trade secret. S.C. Code Ann. § 39-8-30.

When evaluating the restrictive covenants, courts look at whether the restriction is reasonable “in that it is no greater than necessary to protect the employer’s legitimate interests, and it is not unduly harsh in that it curtails the employee’s ability to earn a living.”

Subject matter is the only truly relevant factor and it must be balanced by “weighing the competing interest of employer and employee and giving full consideration to the public interest.”

“A geographic restriction is generally reasonable if the area covered by the restraint is limited to the territory in which the employee was able, during the term of his employment, to establish contact with his employer’s customers.”

 

Curvature Inc. brought suit against British contractor Cantel Computer Services LTD (“Cantel”) for breach of contract, unfair and deceptive trade practices, tortious interference, and violations of the North Carolina Trade Secrets Protection Act in North Carolina Business Court, a special forum within North Carolina’s Superior Court that handles cases involving complex and significant issues of corporate and commercial law.

Curvature hired Cantel to provide IT services in the United Kingdom, and as part of this arrangement, the parties signed an agreement to protect any Curvature trade secret information provided to Cantel and require Cantel to safeguard that information and not steal Curvature’s customers or employees. Curvature now alleges that Cantel breached that agreement by hiring three employees from Curvature’s United Kingdom office and approaching five Curvature customers in the United Kingdom. Curvature is seeking an injunction to prevent further violation of the parties’ agreement, an order to return Curvature’s trade secret information, and compensatory damages that it alleges should be tripled due to Cantel’s deceptive trade practices.

Cantel moved to dismiss on several grounds. Cantel claims that the North Carolina court lacks jurisdiction because Cantel has never done any work in North Carolina or even in the United States and has no North Carolina employees. In addition, Cantel claims that it never entered any formation agreement with Curvature and instead had a business agreement with Exquip Network Services Limited, a British IT company, whose parent company later merged with Curvature to become Curvature Services UK. At best, Cantel employees claim they did limited work for Curvature Services UK.

This case is a helpful reminder about the importance of maintaining trade secret protections abroad which takes on increasing significance as valuable intellectual property regularly crosses global borders.

You can access the complaint by clicking here.

Huawei Technologies Co., the world’s largest telecommunications company, and CNEX Labs Inc. went to trial this week in the U.S. District Court for the Eastern District of Texas over dueling allegations of trade secret theft relating to semiconductor chip technology behind solid-state drives. Huawei Technologies Co. Ltd. et al v. Huang et al, No. 4:17-cv-00893-ALM.

The dispute began in 2017 when Huawei sued former employee and CNEX co-founder Yiren Huang, alleging he stole Huawei technology and recruited fourteen employees to compete with Huawei. Huawei brought breach of contract and trade secret misappropriation claims in violation of the Defend Trade Secrets Act (“DTSA”) and the Texas Uniform Trade Secrets Act (“TUTSA”) among others. CNEX admitted it employs fourteen former Huawei employees but denied any impropriety. Instead, in 2018, CNEX filed a countersuit, claiming Huawei and Chairman Eric Xu engaged in a years-long conspiracy to steal CNEX’s trade secrets and that Mr. Xu ordered a Huawei engineer to pose as a potential customer and meet with CNEX officials in June 2016 to acquire proprietary information and authored and submitted a report to a Huawei competitive-intelligence database detailing CNEX’s technology. CNEX further alleges Huawei attempted to steal CNEX’s trade secrets through Xiamen University, which acquired a CNEX computer memory board purportedly for an academic research project and subject to a licensing agreement and a non-disclosure provision, by requiring the University to share all research test reports with Huawei, which then incorporated the research results into chip projects. Huawei denied misappropriation.

This case taps into larger concerns about Chinese companies engaging in trade secret theft. As recently covered by Crowell & Moring’s Trade Secrets Trends Blog and a piece authored by a former Deputy Director of WIPO, the United States government blacklisted Huawei due to these national security concerns. Tech giants Google, Intel, Qualcomm, and Micron have also stopped doing business with Huawei out of concerns over trade secret theft resulting in the loss of valuable intellectual property. However, the outcome of this trial remains to be seen.

On April 1st, 2019, the Greek Law 4605/2019 implementing the Trade Secrets Directive 2016/943 was published in the Official Gazette. This new law creates a framework for the protection of business information and know-how. Before that date, Greek law did not provide for any legal protection against the expropriation or theft of for example software source code, early stage inventions, product prices and customers’ and suppliers’ lists. Under the new Greek law, trade secrets will now enjoy comprehensive protection.

The Directive introduces a uniform definition of trade secrets, a concept that did previously not exist under Greek law, as requiring three elements:

  1. it is not generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
  2. it has commercial value because it is secret; and
  3. it has been subject to reasonable steps taken by the person lawfully in control of the information to assure its secrecy.

The law establishes the conditions for the existence of an unlawful acquisition, use or disclosure of trade secrets. Any behavior contrary to honest business practices as well as unauthorized access to the protected information are considered unlawful. Furthermore, the use or disclosure of a trade secret without the owner’s consent is unlawful if the trade secret was acquired unlawfully. The use or disclosure is also unlawful if it is in breach of a confidentiality agreement or contractual obligations prohibiting the disclosure of a trade secret, as well as limiting their use.

The victim of an unlawful acquisition, use and disclosure of trade secrets, also known as the trade secret holder, can seek redress and apply for civil law remedies, including the award of damages, injunctions prohibiting the use or disclosure of the trade secret, and recall of the infringing goods.

For quite some time, Greece remained among the EU member states that had not transposed the Directive, since it missed the transposition deadline of June 9th, 2018. Although based on European case law on “direct effect,” individuals in Greece could technically rely on the Directive against the authorities of Greece in court proceedings and claim the rights granted by it, adoption of Greek Law 4605/2019 now provides a national legal framework to safeguard trade secrets against unlawful acquisition, use and disclosure and protect this increasingly valuable information in the global economy.

As in most states, the enforceability of restrictive covenants or non-compete clauses in the Fifth Circuit turns primarily on the reasonableness of the restriction’s geographic and temporal scope. Louisiana and Texas have enacted statutes explaining when non-competes may be enforced. But in Mississippi, enforcement is determined entirely by common law, and courts will consider the public interest in addition to the interests of the parties involved.

State
Law governing restrictive covenants
Restrictive covenants in employment agreements may be enforced if:
Louisiana La. Stat. Ann. § 23:921.

1.       It prevents the employee from engaging in a competing or similar business.

2.       It is for a period of, at most, two years after the individual’s termination date.

3.       It specifies the geographic scope by identifying the covered parishes and municipalities.

4.       The geographic scope is limited to areas where the employer conducts business.

Texas Tex. Bus. & Com. Code Ann. §§ 15.50; 15.52.

1.       It is ancillary to or part of an otherwise enforceable agreement when the agreement is made.

2.       It is reasonable concerning time, geographical area, and scope of activity to be restrained.

3.       It imposes no greater restraint than necessary to protect the employer’s (or promisee’s) goodwill or other business interest.

Mississippi

Common law

Redd Pest Control Co. v. Heatherly, 157 So.2d 133 (Miss. 1963).

It is reasonable considering the following factors:

1.       The duration of the restraint.

2.       The geographic scope of the restraint.

More generally, courts will consider the rights of the employer, the rights of the employee, and the rights of the public when weighing these factors.

On Wednesday, May 15th, President Trump declared a national emergency via executive order over threats against American technology. The order authorized Department of Commerce Secretary Wilbur Ross, in consultation with various other agency heads to block transactions involving information or communications technology posing an “unacceptable risk to the national security of the United States.”

The Department of Commerce subsequently added Huawei Technologies Company Ltd. (“Huawei”) and 68 of its non-U.S. affiliates to the Bureau of Industry and Security (“BIS”) Entity List, which restricts U.S. companies from selling or transferring technology to Huawei without a BIS-issued license. The move effectively prevents Huawei from acquiring parts from its U.S. suppliers, and prevents certain telecommunications companies from using Huawei equipment for critical services. While many larger telecommunications companies have moved away from using Huawei technology, some smaller companies still depend on Huawei to provide service in rural areas.

BIS announced on May 20th, however, that it would be issuing a 90-day Temporary General License (“TGL”) to small rural telecommunication companies to make other arrangements to replace Huawei equipment. Specifically, the TGL authorizes activities necessary to the continued operations of existing networks and to support existing mobile services.

These actions taken against Huawei are part of a long series of confrontations between the Trump administration and Huawei. Earlier this year, the Department of Justice (“DOJ”) charged Huawei Device Co. Ltd. and Huawei Device USA Inc., two units of Huawei, with trade secrets conspiracy, wire fraud, and obstruction of justice. The two Huawei units pled not guilty and trial is set for March 2nd, 2020. The trade secret charges date back to 2014, when T-Mobile sued Huawei for stealing designs and parts of the company’s testing robot, “Tappy.” In that case, the jury found that Huawei had misappropriated Tappy, but declined to award the punitive damages that T-Mobile was seeking.

On May 10, 2019, the Delaware Chancery Court issued an opinion adopting a “narrow approach” in interpreting Section 1030(a)(2)(C) of Computer Fraud and Abuse Act (CFAA). Section 1030(a)(2)(C) imposes liability on a person who “intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains… information from any protected computer.” 18 U.S.C. § 1030(a)(2)(C).

Federal courts remain divided on the interpretation of Section 1030(a)(2)(C). For example, the First, Seventh, Fifth, and Eleventh Circuits interpret the statute broadly, finding that acts of misuse of company information “exceed[ ] authorized access,” even if the accused individual or employee had authority to access the information. The Ninth, Second, and Fourth Circuits, which have adopted a narrow approach in interpreting Section 1030(a)(2)(C), simply ask if the individual or employee had authority to access the information at issue, and do not consider a person’s misuse of accessed information.

Here, Plaintiff alleges that the Defendant copied company files from his work-issued computer onto his personal drive on two separate occasions—once before and once after the termination of his employment—and subsequently used the confidential information when he began working at a competitor. The Chancery Court noted that the ordinary meanings of the terms “without authorization” and “exceeds authorized access” do not encompass “misusing the information the employee had a right to access.” The Court also considered the rule of lenity in making its decision, which requires a court to construe criminal statutes “strictly to avoid interpretations not ‘clearly warranted by the text.’”

Because Defendant had authority to access the information at issue before his resignation, the Court found that there could be no liability under the CFAA for the first alleged instance of misappropriation. However, the court found that Plaintiff had adequately pled a CFAA violation for the second instance of misappropriation that occurred after Defendant’s resignation. The case is AlixPartners, LLP, and AlixPartners Holdings LLP vs. David Benichou, C.A. No. 2018-0600-KSJM, before the Delaware Chancery Court.

A federal district court in San Jose recently ruled, in WeRide Corp., et al. v. Kun Huang, et al., that employee non-solicitation agreements are “void” under California Business & Professions Code section 16600 because such agreements are an invalid restraint on employment. This is the second federal court opinion this year that has barred enforcement of a post-employment non-solicitation agreement.

Click here to read the full version of this alert, authored by Crowell & Moring Partner Tom Gies and Counsel Suzanne Rode.

On April 16, 2019, the EU Parliament approved a draft directive for new harmonized rules on the protection of whistleblowers. The Directive of the European Parliament and of the Council on the Protection of Persons reporting on Breaches of Union Law (the “Whistleblowing Directive”) creates EU-wide minimum standards to protect persons disclosing information to which they are privy in the context of their work and which relates to certain breaches of EU law. These include breaches of the rules on public procurement, financial services, money laundering, environmental protection and nuclear safety, EU competition law, food and product safety, consumer and data protection law.

The EU Council and the Parliament have now reached a provisional agreement on the final act. After formal approval, the Whistleblowing Directive will be published in the Official Journal of the European Union, after which Member States have two years to implement the Directive into national law. The below is based on the current version of the draft, which may of course still undergo changes before the final approval.

Click here to read the full version of this alert, authored by Crowell & Moring Partner Emmanuel Plasschaert, and Associates Evelina Roegiers and Louis Vanderdonckt.

In trade secret misappropriation cases, the scope and sufficiency of the trade secret identification are central issues. And, once resolved, plaintiffs may allege new trade secrets thefts gleaned during fact discovery, which rekindles those issues. Recently, the United States District Court, Northern District of Illinois closely scrutinized just such lately raised trade secrets in Motorola Solutions, Inc. v. Hytera Communications Corp. There, after two years in a “hard-fought, contentious case,” with just twelve days left in fact discovery, Motorola moved for an order compelling Hytera to produce documents relating to a newly alleged trade secret – related to its TETRA products. This was in addition to the 142 trade secrets related to DMR products that Motorola had previously claimed were at issue.

According to Motorola, Hytera’s TETRA products had similar functions as Hytera’s DMR products which were already part of the lawsuit, so Motorola sought “without further delay” the source code and sales data for Hytera’s TETRA products. The timeliness of this request was at the forefront of the discovery dispute. Motorola argued that it first learned of the stolen TETRA trade secrets in February 2019, when it found a document within Hytera’s December 2018 document production of nearly 3 million pages. And, Motorola went on to argue that once it learned of this new misappropriation, it promptly supplemented its prior interrogatory responses to identify the TETRA products as being misappropriated. Finally, Motorola claimed that Hytera admitted in previous pleadings that the TETRA products were part of the trade secret misappropriation and had agreed to extend the discovery period in order to produce the requested TETRA information.

Unfortunately for Motorola, the Court did not agree. First, the Court forcefully rejected Motorola’s claim that Hytera had agreed that the TETRA products were part of the case. The Court found that “context matters” and Motorola’s reliance on that single sentence was “not an approach guaranteed or even likely to arrive at a fair and accurate approximation of the truth.” The Court determined that the context showed that Hytera firmly opposed any expansion of Motorola’s trade secret claims. Second, the Court concluded that the 5-week extension of the close of discovery was clearly not done to allow Hytera time to produce TETRA documents. Instead, the Court concluded that Hytera would not have agreed to such a short continuance to deal with the unresolved discovery issues in the case (including Motorola’s late production of 37 million pages of documents) as well as Motorola’s claims of a new basis of trade secret misappropriation. Finally, the Court noted that the document which Motorola claims triggered its “epiphany” in February 2019 was similar to a document Hytera produced in January 2018. Thus, it found that Motorola had waited too long to seek discovery on the TETRA products.

In short, the Court rejected Motorola’s request to expand the litigation significantly so late in discovery. The outcome might have been different had the request came earlier in the case. However, this case highlights the difficulty practitioners may have when balancing the requirement that trade secrets be defined early on against the later discovery of other potential trade secret misappropriations.