Friday, December 23, 2016

Year-End Extravaganza (Part 3): Top 10 Developments in Non-Compete and Trade Secrets Law for 2016

The first two installments of my year-end review were designed to be pragmatic, to offer my perceptions of the most common mistakes made in employee competition disputes. The third installment is more traditional and recaps the year's top legal developments throughout the country concerning non-compete and trade secrets law.

10. California amends Labor Code provision affecting non-competes. Advising clients on non-compete issues is much more involved than just analyzing the restriction's scope. It's also about assessing clauses that are secondary to the agreement, namely provisions governing arbitration, fee-shifting, choice-of-law, and choice-of-venue. These clauses take on added importance when non-compete issues arise for California residents because that state bans non-compete contracts. Some courts have allowed non-competes against California residents when the underlying contract contains both a forum-selection clause mandating venue outside California and a provision requiring application of another state's laws. Seeking to close this rather narrow but significant loophole, California's legislature has tightened the Labor Code and will give employees the option to void these important contract provisions. For more, read my October 18 post on this development.

9. States limit enforcement of physician non-competes. States have a patchwork of exceptions to their general statutory or common-law rules governing non-competes. Lawyers are exempted, but there's no real rhyme or reason to other industry-based exemptions. This year was full of legislative activity, once again, including categorical bans on non-competes for workers in specific industries. Both Connecticut and Rhode Island limited the enforcement of non-competes against physicians. My July 11 summary on the Connecticut law can be found here, and the discussion concerning Rhode Island's legislative change is available here.

8. Utah changes non-compete law. Aside from categorical bans, other states limited the circumstances in which companies could enforce non-competes. Utah enacted the Post-Employment Restrictions Act, limiting non-competes to a duration of one year. Employees also have the right to seek legal fees for defending an enforcement action if the agreement is found to be unreasonable. The development is particularly noteworthy, since Utah is the reddest of red states politically. However, unlike dysfunctional state legislatures in North Carolina and Illinois, Utah's actually works quite well and develops legislative compromises on even the most difficult areas of public policy. Please read my May 6 post for a more detailed discussion of the new state non-compete law.

7. Ninth Circuit closes the book on Nosal computer fraud dispute. The most well-known case brought under the Computer Fraud and Abuse Act, to date, has been United States v. Nosal. The Ninth Circuit now has issued two significant appellate rulings, which interpret key provisions of the CFAA. In the first go-around, Nosal scored a win, prevailing on a narrow interpretation of the statutory term that one can be held liable when he "exceeds authorized access" to a protected computer. The second time around, Nosal was not as fortunate. The Ninth Circuit in Nosal II found that the former Korn Ferry executive violated the CFAA's proscription on accessing a computer "without authorization" when he obtained an employee's password to access a database containing information on executive search candidates. The lengthy opinion (which features a strong dissent) has produced a lot of commentary and even a revised opinion. My thoughts on the case can be found in my July 25 post here.

6. Feds seek to limit "no-poach" agreements. In October, the Department of Justice and the Federal Trade Commission issued its Antitrust Guidance for Human Resource Professionals concerning a topic that is well-known to large technology companies: horizontal employee "no-poaching" agreements. The DOJ and FTC have pledged to criminally investigate these arrangements, which serve to restrict labor markets even in employee-friendly jurisdictions in California. Whether this initiative changes with a new administration is a question that would yield rank speculation. The incoming president has been fairly vocal about investigating antitrust complaints, and he has no love for Silicon Valley. My November 14 post on this topic can be found here.

5. NLRB continues to scrutinize non-disclosure contracts. One of the more unforeseen developments over the past couple of years has been the interest the National Labor Relations Board has taken in policies and contracts that limit union organizing activity. Some sources of the friction between private companies and the NLRB are handbook policies, employment contracts, and severance arrangements. This year, in Quicken Loans, Inc. v. NLRB, the United States Court of Appeals for the District of Columbia enforced an NLRB order that struck down overbroad non-disclosure clauses and non-disparagement covenants. Private enforcement actions, such as the recent John Doe v. Google case, may be the next litigation frontier in this arena. My August 22 summary of the Quicken Loans opinion is available here.

4. Nevada rejects blue-pencil doctrine. The most significant state court ruling on non-compete law came from a state that rarely has waded into the fray: Nevada. In a thoughtful opinion, the Supreme Court of Nevada soundly rejected the blue-pencil doctrine (a judicially-created doctrine of equity used to modify or rewrite overbroad non-compete agreements). This ruling places Nevada squarely in the minority, but it's indeed a vocal and persuasive minority. The case is Golden Road Motor Inn, Inc. v. Islam. You can read my July 28 post on the decision by clicking here.

3. Attorneys General step up scrutiny on oppressive non-compete contracts. This could be called the Year of Jimmy John's...and not just because my daughter begs to go there all the time. The sandwich chain thrust itself into non-compete law by requiring low-level employees to sign broad restrictive covenants. This profoundly silly policy was a public-relations disaster and caused state attorneys general to intervene. Ultimately, Jimmy John's had to pay the State of Illinois a $100,000 settlement. Attorneys General in New York and Illinois have pledged to investigate other firms' misuse of broad non-competes into the coming year. Presumably, they will target companies that require broad restrictions throughout the corporate hierarchy, irrespective of employees' ability to cause any harm. My August 30 blog post discusses enforcement actions in Illinois.

2. White House issues non-compete "Call to Action." In October, the White House released its Call to Action and urged state lawmakers to adopt significant reforms to non-compete law. The proposal generally implores states to do three things: (a) ban non-competes for low-wage workers, those who do not have access to trade secrets, and those are who are laid off; (b) require upfront disclosure about non-competes and additional tangible consideration (beyond mere employment itself) for employees who sign them; and (c) adopt a strict red-pencil doctrine that would eliminate a court's discretion to rewrite overbroad agreements. My discussion from October 28 on the White House's Call to Action can be found here.

1. Defend Trade Secrets Act becomes law. Well, at least number one this year was easy. The Defend Trade Secrets Act, long in the works, amends Title 18 of the criminal code and creates a private right of action in federal court for trade secret misappropriation if the trade secret is related to a product or service used in interstate commerce. The DTSA largely tracks existing state law, but it provides the federal muscle that sometimes is necessary in cases of theft. Of the unique statutory provisions in the DTSA, the ones likely to garner the most attention are its express rejection of the inevitable disclosure theory of misappropriation (still a viable theory in some states), the provision enabling ex parte seizures of items (such as laptops) used to commit trade secrets theft, and a clause protecting whistleblowers. As of time of this post, we have one Colorado case that discusses the scope of available injunctive relief and one from Massachusetts that involved the whistleblower provision. 2017 should yield a trove of cases addressing key aspects of the law.


So, yeah. Pretty big year. In a few days, the final installment on my year-end extravaganza.

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