Autonomous vehicle technology, while still young, is already a major catalyst of trade secrets-related litigation. In 2018, Uber settled a lawsuit alleging theft of self-driving technology trade secrets from Waymo (Google’s self-driving car spinoff) for $245 million. With the future of the automotive market (and trillions of dollars) at stake, self-driving technology trade secrets are increasingly targets of theft.

2019 has already seen a string of trade secrets litigation related to self-driving technology. Tesla filed suit in March 2019 alleging a former employee stole source code related to Tesla’s self-driving technology—characterized in the complaint as “a crown jewel of Tesla’s intellectual property portfolio.” Defendant Guangzhi Cao, a member of Tesla’s elite team of autopilot engineers, quit his job on January 3rd after accepting a position with Xiaopeng Motors, a Chinese electric automaker, but not before uploading complete copies of Tesla’s autopilot-related source code to his personal iCloud account. Xiaopeng Motors is a destination employer for engineers formerly associated with self-driving research teams at American tech companies. Xiaopeng Motors employs at least five former Tesla employees. An engineer employed by a Tesla-competitor was accused of trade secrets theft and arrested by the FBI at San Jose International Airport in July 2018. The engineer had accepted employment with Xiaopeng Motors.

Most recently, in April 2019, autonomous vehicle company WeRide brought suit under the Defend Trade Secrets Act and California’s Uniform Trade Secrets Act against its former CEO, former Director of Hardware, and two associated companies. WeRide alleged former Director of Hardware Kun Huang copied company files onto a USB and shortly after his departure founded a competing autonomous vehicle company, also a named defendant. All of the parties were engaged with developing autonomous vehicles for the Chinese market. The U.S. District Court for the Northern District of California granted WeRide’s request for a preliminary injunction as to Huang and the two defendant companies.

An April 2019 investigation by NPR and Frontline found that the White House estimates such practices cost the U.S. economy more than $57 billion a year. As reported by Forbes, the Chinese Foreign Ministry stated that the “Chinese government has never participated in or supported any theft of trade secrets. We do not accept and are firmly opposed to such accusations.”

The referenced cases are Tesla, Inc. v. Cao, No. 3:19-cv-01463-VC, U.S. District Court for the Northern District of California; and, WeRide Corp. v. Kun Huang, et al., No. 5:18-cv-07233-EJD, U.S. District Court for the Northern District of California. Stay tuned for updates on self-driving technology related trade secrets litigation.

In the Third Circuit, common law generally governs the use of restrictive covenants. States in this Circuit employ a reasonability standard to determine whether a restrictive covenant is enforceable. In New Jersey, even if a covenant is found to be reasonable, it may be limited in its application by: geographical area, period of enforceability or its scope of activity. Pennsylvania also uses common law to determine if a restrictive covenant is enforceable but restrictive covenants are generally disfavored.

State
Law governing restrictive covenants
Restrictive covenants in employment agreements will be enforced:
Delaware

Common Law

 

See TP Group CI, Inc. v. Vetecnik, 2016 WL 5864030 (D.Del. Apr. 14, 2016).

Delaware law recognizes employment restrictive covenants when such covenants:

  1. Adhere to general principles of contract;
  2. Are reasonable in scope and duration;
  3. Advance the legitimate economic interests of the party enforcing the covenant; and
  4. Survive balance of the equities.
New Jersey

Common Law

 

See Jiffy Lube Intern., v. Weiss Bros.,Inc., 834 F.Supp. 683 (D.N.J. 1993).

A restrictive covenant will generally be found reasonable where it:

  1. Protects the legitimate interest of the employer;
  2. Imposes no undue hardship on the employee; and
  3. Is not injurious to the public.
Pennsylvania

Common Law

 

See Freedom Medical Inc. v. Whitman, 343 F.Supp.3d 509 (E.D.Pa. 2018).

Restrictive covenants are permitted under Pennsylvania, if:

  1. They relate to a contract for employment;
  2. Are supported by adequate consideration; and
  3. The application of the covenant is reasonably limited in both time and territory.

States within the Seventh Circuit employ the reasonability standard used in many other circuits to determine whether a restrictive covenant is enforceable. Two of these states, Illinois and Indiana, apply a common law framework but largely disfavor such covenants as a restraint on trade. Wisconsin’s restrictive covenant statute focuses on the reasonableness of the agreement as well, but will void the entire agreement if even a portion of the agreement is “illegal, void and unenforceable” – even if the remaining portions of the agreement are otherwise enforceable.

State
Law governing restrictive covenants
Restrictive covenants in employment agreements will be enforced:
Illinois

Common Law

See Lawrence & Allen v. Cambridge Human Resource Group, 292 Ill. App. 3d 131 (1997).

  • A restrictive covenant will be enforced only if the terms of the agreement are reasonable and necessary to protect a legitimate business interest.
  • A restrictive covenant’s reasonableness is measured by its hardship to the employee; its effect upon the general public; and the reasonableness of the time, territory, and activity restrictions.
  • Before considering whether a restrictive covenant is reasonable, however, the court must make two determinations:
    1. whether the restrictive covenant is ancillary to a valid contract; and
    2. whether the restrictive covenant is supported by adequate consideration.
Indiana

Common Law

See Grand Union Tea Co. v. Walker, 208 Ind. 245 (1935); Zimmer, Inc. v. Howmedica Osteonics Corp., 2018 U.S. Dist. LEXIS 31294, (N.D. Ind. Feb. 27, 2018); Pathfinder Communications Corp. v. Macy, 795 N.E.2d 1103 (Ind. Ct. App. 2003); MacGill v. Reid, 850 N.E.2d 926 (Ind. Ct. App. 2006).

  • In Indiana, to be enforceable, the employer must prove that a restrictive covenant is reasonable with respect to the legitimate interests of the employer, restrictions on the employee, and the public interest.
  • The agreement must be reasonable in scope as to the time, activity, and geographic area restricted, such that it restricts an employee only so far as necessary to protect the employer’s legitimate interests.
Wisconsin Wis. Stat. § 103.465; see also Star Direct Inc. v. Dal Pra, 319 Wis. 2d 274 (2009).
  • Wis. Stat. § 103.465 provides that a covenant not to compete is lawful and enforceable “only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.”
  • Pre- and post-termination non-compete agreements are lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer.
  • Wisconsin courts have interpreted Wis. Stat. § 103.465 as requiring that the employer prove the following five prerequisites: a restrictive covenant
    1. is necessary for the protection of the employer, i.e., the employer must have a protectable interest justifying the restriction imposed on the activity of the employee;
    2. provides a reasonable time limit;
    3. provides a reasonable territorial limit;
    4. is not harsh or oppressive as to the employee; and
    5. is not contrary to public policy.

 

On March 22, 2019, the State of Utah amended its non-compete statute for the third time in only three years.

“Strike One” came in 2016, when the State of Utah enacted Utah Code Annotated 34-51-201 et seq.to restrict the validity of post-employment restrict covenants to no more than one year from the date on which an employee is no longer employed by the employer. (But it only applied to covenants entered into on or after May 10, 2016).

Two years later in 2018, “Strike Two” placed conditions on when and where the amended statute applies, in response to lobbying by the broadcasting industry. For example, employers could not limit competition if the employee leaves the employer before contract expiration and an employer could only enforce a non-compete if the employment contract did not exceed four years. Additionally, an employer could only enforce a non-compete if the employer terminated the employee for cause or the employee breached the employment contract that results in his or her separation from the employer.

But, just a year later, the state of Utah took another swing and removed the four-year limit, and replaced it with new language permitting the application of a non-compete in any written contract of “reasonable duration, based on industry standards, the position, the broadcasting employee’s experience, geography, and the parties’ unique circumstances.”

With these changes, employers in Utah must keep in mind the shifting laws on the applicability and enforcement of non-competes. Time will tell if Utah hit it out of the park with these new requirements.

Each of the states within the Eleventh Circuit governs the use of restrictive covenants through statutes. Generally, both Florida and Alabama permit the use of restrictive covenants where the restrictive covenant is “reasonably necessary” to protect a legitimate business interest, but the legitimate business interest requirement is applied differently in both jurisdictions. Alabama law prohibits any contract that prevents an individual from exercising a lawful profession, trade, or business of any kind, unless it falls within one of the 6 restrictive covenant exceptions specified in the statute. Florida, however, permits the enforcement of contracts that restrict or prohibit competition during or after the term of restrictive covenants, provided that such contracts are reasonable in time, area, and line of business. Georgia, which recently amended its statute, used to be one of the most difficult states in which to enforce restrictive covenants against employees. It now permits Georgia courts to partially enforce overbroad restrictive covenants.

State
Statutes Governing Restrictive Covenants
Requirements for Enforcement of Restrictive Covenants
Alabama AL ST § § 8-1-190 to 8-1-197
  • Agreement must be in writing, signed by all parties, and supported by adequate consideration.
  • The party resisting enforcement of the covenant has the burden of proving the existence of undue hardship, if raised as a defense.
  • Does not eliminate professional exemptions recognized by Alabama law.
  • Where restrictive covenant is “overly broad” or “unreasonable in its duration,” court may void the restraint in part and reform it to preserve the protectable interest.
  • If restrictive covenant does not come within the 6 restrictive covenant exceptions (including non-solicitation and non-competition agreements), court may void restraint “in its entirety.”
Florida FL ST § 542.335
  • Reasonable in time, area, and line of business.
  • Agreement must be in writing, signed by all parties.
  • Must be “reasonably necessary” to protect a “legitimate business interest” justifying restrictive covenant. Otherwise covenant is unlawful, void, and unenforceable.
  • Duration of more than 2-10 years, depending on whom the restrictive covenant is being enforced against, implies a rebuttable presumption of unreasonableness.
Georgia GA ST § § 13-8-50 to 13-8-59
  • Non-compete must have a geographical limitation. A customer non-solicit need not.
  • In some cases, courts can consider the economic hardship imposed on employee by enforcement of covenant in determining its reasonableness.
  • Duration of more than 2-5 years, depending on whom the restrictive covenant is being enforced against implies a rebuttable presumption of unreasonableness.
  • Court may “modify” an overbroad restrictive covenant provision. Court may strike out or remove language that renders covenant unenforceable, but it cannot rewrite or otherwise add language.
  • A non-compete provision may only be enforced against an employee who:
    1. customarily and regularly solicits customers or prospective customers;
    2. customarily and regularly engages in making sales;
    3. has a primary duty of managing a company, or one of its departments or subdivisions, directs the work of two or more employees and has the authority to hire or fire other employees; or
    4. performs the duties of a “key employee” or a “professional” as defined by the RCA.

 

Germany recently adopted new legislation governing trade secret protection. The “Gesetz zum Schutz von Geschäftsgeheimnissen” (or Trade Secrets Act) implements European Union Directive 2016/943, which is intended to harmonize trade secrets law across the European Union. While many of the core provisions of the Trade Secrets Act will be familiar to practitioners of U.S. trade secrets law, they are new to Germany. For example, German law did not previously define what constitutes a protectable trade secret. The Trade Secrets Act now clarifies that both technical know-how (such as specifications, designs, and manufacturing methods) and business information (such as customer and market data) could potentially qualify as a trade secret. Similarly, the Trade Secrets Act also imposes obligations on trade secret owners to implement actual and reasonable measures to maintain the secrecy of asserted trade secrets. No such requirement existed under prior law. The new Trade Secret Act also affirmatively allows competitors to reverse engineer trade secrets, so long as doing so is not prohibited by contractual obligations among parties. Given these and other significant changes, companies doing business in Germany may need to update their best practices for trade secrets to ensure continued protection.

Unlike in the Ninth Circuit, in states comprising the Second Circuit, common law generally governs the use of restrictive covenants. Still, many of the specific factors for analysis in these states will be familiar, given the widely accepted “reasonability” standard for adjudicating the propriety of such agreements. Both the Vermont and N.Y. State Legislatures have introduced bills restricting the use of restrictive covenants, but to date, neither bill has passed. Vermont’s iteration, known as House Bill 556, would generally ban “agreement[s] not to compete or any other agreement that restrains an individual from engaging in a lawful profession, trade, or business.” The bill leaves carve outs for (1) restrictive covenants in the sale of an ownership interest in a business entity, or dissolution of a partnership, and (2) agreements formed to prohibit the disclosure of trade secrets. The New York law, known as Bill No. A07864A, takes a different approach. It outlaws any non-compete agreement purporting to limit an employee making less than $75,000 from seeking employment within a certain geographic area, for a specified period of time, with a particular employer or in a particular industry.

State
Law governing restrictive covenants
Restrictive covenants in employment agreements will be enforced:
New York

Mixed.

Generally, restrictive covenants are governed by the common law. See BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999); Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303 (1976).

Restrictive covenants in the broadcast industry are illegal pursuant to N.Y. Lab. Law § 202-k.

  • Except in the broadcasting context, if the limitations found therein are reasonable in both time and area,
  • Necessary to protect employer’s legitimate interests,
  • Not harmful to the general public, and
  • Not unreasonably burdensome to the employee.
Vermont

Common law.

See Summits 7, Inc. v. Kelly, 2005 VT 97 (2005).

  • Unless the agreement is counter to public policy,
  • Unnecessary to protect the employer, or
  • Unnecessarily restrictive of the rights of the employee,
  • In the context of the subject matter of the contract, and the relevant circumstances and conditions.
Connecticut

Mixed.

Generally, restrictive covenants are governed by the common law. See Deming v. Nationwide Mut. Ins. Co., 279 Conn. 745 (2006); Scott v. Gen. Iron & Welding Co., 171 Conn. 132 (1976).

In the limited context of physician non-competes entered into after July 1, 2016, Conn. Gen. Stat. § 20-14p governs.*

  • Except against physicians, only if
    • They are necessary to protect a legitimate business interest, including trade secrets and customer lists,
    • Are reasonably limited in time, geography, and practice restrictions to protect those business interests, and
    • Otherwise consistent with the needs of the public, including the employee’s need to earn a living, and the public’s need for the employee’s presence in the labor pool.

* Conn. Gen. Stat. § 20-14p states that no restrictive covenant may (1) restrict a physician’s competitive activities for more than one year, or in a geographic region greater than fifteen miles from the primary site where the physician practices, or (2) be enforced against a physician if (a) the agreement containing the covenant was not made in anticipation, or as a part of, a partnership or ownership agreement and such agreement expires, unless the employer makes a bona fide effort to renew the contract on the same or similar terms, or (b) if the physicians employment or contract was terminated by the employer, unless it was terminated for cause.

Last month, the Government Accountability Office (GAO), the legislative agency tasked to conduct auditing, evaluation, and investigative services for the U.S. Congress, released a report regarding the sustainment of operational system software for Department of Defense (DoD) weapon systems. Software sustainment is essential to the operations of DoD weapon systems, including tactical and combat vehicles, and military aircraft.

In relevant part, the report examined the extent to which the DoD has addressed challenges to securing necessary data rights—or the Government’s nonexclusive license rights in two categories of intellectual property (IP), “technical data” and “computer software,” delivered by contractors under civilian agency and DoD contracts—to sustain weapon system software.

GAO found that DoD often “negotiates for license rights, and not ownership, of technical data or computer software, to be delivered under a contract” and that “DoD strives to balance the cost of purchasing rights against the extent of data rights it expects it will need to maintain and support the system for years into the future.” Of note, the GAO explained that DoD faces challenges regarding data rights, including having partial, incomplete, or unclear data rights to sustain weapon software. According to GAO, DoD has initiated remedial measures, including creating a cadre of IP experts intended to ensure a consistent, strategic, and knowledgeable approach to acquiring or licensing IP by providing expert advice, assistance, and resources to the acquisition workforce on IP matters. The GAO recommended that DoD develop an implementation plan with time frames for key milestones for establishing the cadre of experts.

GAO’s report and findings shed insight on the DoD’s approach to obtaining IP from contractors related to software sustainment, as well as to how the DoD intends to mitigate its continuing challenges in acquiring that IP. Contractors should be aware of the DoD’s challenges and its planned remedial measures to the extent that it may affect existing or future business opportunities.

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.