Employee Misappropriation

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.

Legislation recently introduced in the United States Senate to protect low-wage workers could roll back the use of non-compete agreements, a common tool companies use to protect their trade secrets.

Florida Senator Marco Rubio introduced the “Freedom to Compete Act,” which aims to protect low-wage and entry-level employees from non-compete agreements, which generally restrict former employees from working at or starting competing businesses. Under this proposed legislation, employers would be prohibited from entering into, enforcing, or threatening to enforce non-compete agreements against workers considered “non-exempt” under the Fair Labor Standards Act (FLSA). Unlike certain executive and administrative employees, “non-exempt” workers must be paid at least the federal minimum wage and are entitled to overtime pay.

Proponents of this legislation argue that non-compete agreements unfairly restrict employment opportunities for low-wage and entry-level workers by limiting their economic mobility and their ability to negotiate for higher wages and training, which is compounded by the fact that many of these workers may already face limited employment opportunities in the current economy. In addition, proponents point out that these workers are less likely to have access to confidential information and trade secrets in the first place. Companies have long turned to non-compete agreements to ensure their trade secrets are protected, and studies indicate that about 18% of all U.S. workers are subject to non-compete agreements. If this legislation passes, companies may be forced to reevaluate what level of disclosure risk low-wage employees pose to their trade secrets and how best to protect those trade secrets without the benefit of routine non-compete agreements.