Trade Secrets & Noncompete Blog

Trade Secrets & Noncompete Blog

News & Updates On Developments in the Law of Restrictive Covenants, Unfair Competition & Trade Secrets

Employer Must Abide by Non-Compete Payment – Employment Law This Week

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Featured on Employment Law This Week: An employer cannot waive its own non-compete agreement to avoid payment, unless the agreement specifically grants it the right to do so.

An employee of a financial services firm in Illinois signed an agreement that required a six-month post-employment non-competition period in exchange for $1 million from his employer. When the worker resigned, the employer sent a notice waiving the agreement and telling the employee that it would not pay him the $1 million. After waiting out the six months, the employee filed suit against his former employer. The Illinois Court of Appeals found that there was no provision in the agreement that allowed the employer to change the terms without consent from the worker, and because the employee upheld his end of the contract, the employer must pay him what is due.

Watch the segment below and see our previous post on this topic.

Employer’s Waiver Of Non-Compete Period In Order To Avoid $1 Million Payment Held Ineffective

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In Reed v. Getco, LLC, the Illinois Court of Appeals was recently faced with an interesting situation: under a contractual non-compete agreement, the employer was obligated to pay the employee $1 million during a six month, post-employment non-competition period.  This was, in effect, a form of paid “garden leave” —  where the employee was to be paid $1 million to sit out for six months – perhaps to finally correct his golf slice or even learn the fine art of surfing.  It was a win-win situation that seemingly would be blessed by most courts; it was for a reasonable length of time, and the employee was set to be paid very handsomely for sitting out.  Accordingly, it is doubtful that most judges would have had an issue with it.

Yet here, the employer apparently had second thoughts – and just over a week after the employee resigned, the employer notified the employee that it was waiving the six month non-compete, allowing him to work anywhere, and therefore not paying him any portion of the promised $1 million.

Some non-compete agreements have express clauses allowing an employer to do just this – to shorten the non-compete and thereby avoid contractual non-compete payments — but the Court’s opinion makes mention of no such a clause here.

According to the Court, the employer attempted to justify the non-payment on several grounds.

First, the employer argued that because the non-compete itself was to the employer’s benefit, it was free to waive the non-compete period and not make the accompanying $1 million payment. But the Court effectively said, “whoa, not so fast,” noting that the non-compete agreement also had a clause stating that there could be no waiver of any contractual provision unless “signed by the party against whom the waiver or modification is enforced.” Here, the waiver was being enforced against the employee, but the employee signed no such written waiver and therefore the purported waiver was ineffective.  Moreover, the Court found that there was no language in the agreement indicating that actual enforcement of the non-compete provision was a condition precedent to the $1 million payment.

Second, the employer argued that because there was a provision in the non-compete agreement which allowed the employer to waive the restriction if requested by the employee, the employer had the discretion to modify all of the noncompete restrictions, including the $1 million payment obligation.  Again, the Court found that this interpretation was not supported by the plain and unambiguous language of the provision, which only applied to a situation where the employee requested a waiver.

Finally, the employer argued that the employee had a duty to mitigate, and could not simply spend six months doing as he chose while collecting $1 million from his former employer. The Court held that when an employer breaches an employment contract, the employee generally has a duty to reasonably mitigate damages. However, here the promise was that the employee would not engage in competitive activities for six months and, in exchange, the employee would be paid the promised sum.  The employee abided by his non-compete obligation and sat out for six months, so the Court held that the payment was due.

What should employers take from this decision? Because provisions obligating payment during non-compete periods can impose significant costs on the employer, employers must realistically assess what they are willing to pay. One option to control such costs is to make explicit in the agreement that the employer has the right to shorten any non-compete or garden leave period, and that the employer also has an accompanying right to proportionately reduce or eliminate any accompanying payment obligation. The absence of such an express contractual authorization was the death knell for Getco in this case.

Employers Under the Microscope: Is Change on the Horizon? – Attend Our Annual Briefing (NYC, Oct. 18)

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Employers Under the Microscope: Is Change on the Horizon?

When: Tuesday, October 18, 2016 8:00 a.m. – 4:00 p.m.

Where: New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Latest Developments from the NLRB
  • Attracting and Retaining a Diverse Workforce
  • ADA Website Compliance
  • Trade Secrets and Non-Competes
  • Managing and Administering Leave Policies
  • New Overtime Rules
  • Workplace Violence and Active-Shooter Situations
  • Recordings in the Workplace
  • Instilling Corporate Ethics

This year, we welcome Marc Freedman and Jim Plunkett from the U.S. Chamber of Commerce. Marc and Jim will speak at the first plenary session on the latest developments in Washington, D.C., that impact employers nationwide.

We are also excited to have Dr. David Weil, Administrator of the U.S. Department of Labor’s Wage and Hour Division, serve as the guest speaker at the second plenary session. David will discuss the areas on which the Wage and Hour Division is focusing, including the new overtime rules.

In addition to workshop sessions led by attorneys at Epstein Becker Green – including some contributors to this blog! – we are also looking forward to hearing from our keynote speaker, Former New York City Police Commissioner William J. Bratton.

View the full briefing agenda here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions. Seating is limited.

Non-Solicitation Violation Leads to $6.9M in Damages – Employment Law This Week

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Featured in the top story on Employment Law This Week:  Former employees turned competitors in Pennsylvania are hit with $4.5 million in punitive damages.

An insurance brokerage firm sued a group of employees, claiming that they violated their non-solicitation agreements by luring away employees and clients to launch a new office for a competitor. A lower court awarded the firm nearly $2.4 million in compensatory damages and $4.5 million in punitive damages because of the defendants’ outrageous conduct. On appeal, the appellate court agreed and upheld all damages.

See the segment below and read our recent blog post on this topic.

Appeals Court Divided On Bad Faith Under Illinois Trade Secrets Act

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In a question of first impression, the Illinois Appellate Court recently addressed what constitutes “bad faith” for purposes of awarding attorneys’ fees to the prevailing party under §5 of the Illinois Trade Secret Act (ITSA). That section provides, in pertinent part, that if “a claim of [trade secret] misappropriation is made in bad faith” or “a motion to terminate an injunction is made or resisted in bad faith,” “the court may award reasonable attorney’s fees to the prevailing party.” The Illinois Appellate Court delivered a split decision on the legal standards for assessing whether a “bad faith” fee award is warranted under the statute.

Specifically at issue before the court in Conxall Corp. v. ICONN Systems, LLC, et al., 2016 IL App (1st) 10158 (Sep. 2, 2016), was “whether the trial court had applied the correct legal standard in determining whether Conxall’s claims were brought in ‘bad faith,’ as that term is used and understood in the Act.”  The sharply divided court proposed divergent standards for analyzing this question, despite reaching the same conclusion that the issue should be remanded to the lower court for consideration anew.

One of the three Justices adopted the California Court of Appeal’s approach, which found that “bad faith” under California’s version of the Uniform Trade Secrets Act consists of two components: “(1) objective speciousness and (2) subjective bad faith.” Attentive to the goal of deterring such “bad faith” claims, the resultant standard embraces “speciousness [as a] looser standard” which accomplishes that goal, paired with a finding of “subjective bad faith.”

The other two Justices criticized this two-pronged test (which they noted appears to have taken hold among a number of federal courts), and instead held that the guidepost for an award of attorneys’ fees under ITSA should be “the preexisting definition of ‘bad faith’ in this state.”  While no Illinois court has had the opportunity to define “bad faith” specifically in the context of ITSA prior to ICONN, a “bad faith” test had already been articulated by the Illinois Supreme Court in Kratsack v. Anderson, 223 Ill. 2d 541 (2006) in the context of Illinois’ Consumer Fraud and Deceptive Business Practices Act.  Construing the Kratsack opinion, the ICONN majority held that Illinois state courts should resolve the “bad faith” issue by asking “whether the pleadings, motions and other papers which were filed by the party violated Illinois Court Rule 137” or if “the party’s other conduct during the course of the litigation ran afoul of the underlying purpose of Rule 137, which is to prevent abuse of the judicial process.” Rule 137, Illinois’ frivolous pleading rule, allows for attorneys’ fees when a party interposes its pleading or motion with “any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.” Kratsack, 223 Ill. 2d at 561-62.

There are several take-aways from the ICONN Court’s debate and ultimate finding.

Ask: Has your jurisdiction already made a decision to follow California and the federal court approach to determining “bad faith” under your state’s trade secrets act? If not, has your jurisdiction defined “bad faith” under any other statute?

Whatever the answer to these questions – and regardless of picking the “fed/Cal” or “state” side of the debate as to which legal standard should apply – any such motion for “bad faith” attorneys’ fees under your trade secrets act needs to clearly articulate the applicable standard for “bad faith” and consider the facts of the case in light of that standard.

Non-Solicit Violation: $4.5 Million Punitive Damage Award Upheld

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Rarely do we see punitive damages being awarded in cases involving the movement of employees and information between firms. The Superior Court of Pennsylvania last week affirmed a punitive damage award granted by a Judge of the Court of Common Pleas in such a matter, albeit which also found tort liability against the new employer and the five former employees.

The decision in B.G. Balmer & Co., Inc. v. Frank Crystal & Co. Inc., et al. sets forth a classic example of “bad leavers” and a complicit new employer. Confidential information concerning clients was copied and given to the new employer.  The senior employees, on Company time and using Company facilities, conspired with the new employer to hire the junior employees and solicit existing clients, including the largest and best clients of the Company.  Complete indemnification was provided by the new employer to the employees.  Personnel files were purloined and not returned upon request.  Upon resignation they immediately solicited the company’s largest client and did so using trade secret and confidential information of the Company while disparaging the Company in the process.

Applying Pennsylvania law, the Appellate Court found that the trial court did not abuse its discretion in finding that the defendants’ conduct was outrageous and shocking to the Court’s sense of justice. As summarized by the trial court:

All [Appellants] met on June 25, 2003 in New York City to discuss their resignations and start date at FCC Philadelphia. All [Appellants] knew of the existence of the employment agreements.  The individual [Appellants] cleared out personal belongings at the Balmer Agency, attempted to delete information from Balmer Agency computers, immediately went to work at FCC Philadelphia and immediately began soliciting Balmer Agency clients using Balmer Agency trade secrets in violation of the employment agreements, all with the knowledge and assistance of FCC and for the purpose of benefitting FCC Philadelphia.  This conduct was deliberate and reckless with respect to the violation of their contractual and fiduciary obligations at the Balmer Agency and the resultant damage their actions would create.  The [trial court] finds these actions to be with unjustifiable malice with the intent to establish FCC Philadelphia at the direct and crippling expense of the Balmer Agency.  As a result of this conduct, the Balmer Agency suffered damage.  All revenues in the first year of FCC Philadelphia w[ere] received from Balmer clients.  This intended malice is reflected in [Appellant] Reilly’s letter to Craig Richards stating that 50% of FCC Philadelphia  revenues for 2004, 2005 and 2006 will come from solicited Balmer Agency clients.  He states:  “In short, why compete when we do not have to do so….”

The conduct of the defendants in Balmer provides a roadmap on how not to recruit employees from a competitor and the resulting punitive damages award should be a further deterrent to all bad leavers and their new employers.

Illinois Passes Law Banning Noncompete Agreements for Low Wage Workers

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Illinois Capitol BuildingIllinois recently became one of the first states to ban non-compete agreements for low wage workers when it passed the Illinois Freedom to Work Act. The law, which takes effect on January 1, 2017 and applies to agreements signed after that date, bars non-compete agreements for workers who earn the greater of 1) the Federal, State, or local minimum wage or 2) $13.00 an hour.  At present, because the State minimum wage is below $13.00 per hour, $13.00 an hour is the operative figure in Illinois.

While Illinois is one of the first states to enact this type of blanket ban on non-competes based on the employee’s salary status, in other states, including New Jersey and Maryland, legislation based on eligibility for unemployment compensation has been proposed. Moreover, as we have previously blogged, the New York Attorney General has sought to prohibit companies from agreeing to non-competes with low wage workers.  The White House has also weighed in on the issue of non-compete agreements for low wage workers, questioning whether they protect  legitimate business interests or instead merely hamper labor mobility.

In sum, the political winds are clearly blowing against non-compete agreements for low-wage workers. Employers should be wary of attempting to secure stability in their low wage workforce through non-compete agreements and employers in Illinois should review and, if necessary, revise their employment agreements in light of this new law.

New York Attorney General Targets Non-Competes for Rank-and-File Workers

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This summer, New York Attorney General Eric T. Schneiderman has reached agreements with a number of companies curtailing their use of non-competition agreements with respect to non-executive and low-wage employees in New York. The issue appears to have caught the attention of Mr. Schneiderman, who stated recently that “restricting rank-and-file workers from being able to find other jobs is unjust and inappropriate” and “workers should be able to change jobs without fear of being sued.”

For example, on August 4, 2016, Examination Management Services, Inc. (“EMSI”), a medical information services provider headquartered in Texas, agreed to stop using non-compete agreements for most of its employees in New York. Prior to the agreement, EMSI’s mandatory non-compete agreements prohibited employees for nine months after leaving the company from working for competitors within fifty miles of any locations they worked for EMSI.

As another example, on June 15, 2016, the legal news website Law360 reached a similar agreement with Mr. Schneiderman’s office. Prior to that, Law360 required a majority of employees, including all editorial employees, to sign an employment contract with a non-compete provision that prohibited them for one year after leaving the company from working for any media outlet that provides legal news.

The Attorney General’s actions on this issue may be part of a larger trend. A March 2016 report by the U.S. Treasury Department found that non-compete agreements cause various harms to “worker welfare, job mobility, business dynamics, and economic growth more generally.” A May 2016 report published by the White House reached similar conclusions. Employers thus should make sure that their non-compete agreements with employees protect legitimate business interests such as safeguarding trade secrets and/or customer relationships.

Connecticut and Rhode Island Enact Statutes Restricting Physician Non-Competes

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David J. Clark

David J. Clark

Last month, two New England states enacted laws restricting the use of non-competition provisions in agreements governing an employment, partnership or other professional relationship of a physician.

Broadly speaking, the aim of both of these laws is to protect patients’ choice regarding medical care by limiting the ability of employers or partners to contract with physicians such that the physicians’ ability to practice medicine would be restricted at the end of the professional relationship.

Effective on July 12, 2016, the new law in Rhode Island (R.I. Gen. Laws §5-37-33) prohibits non-compete language in most physician agreements.  It renders void and unenforceable “any restriction on the right to practice medicine” found in virtually any contract creating the terms of employment, partnership or other professional relationship involving a state-licensed physician.  The new law therefore invalidates non-competition or patient non-solicitation provisions for Rhode Island physicians.  The new law does not apply in connection with the purchase and sale of a physician practice, provided the restrictive covenant is less than five years in duration.

Effective on July 1, 2016, the new law in Connecticut (Public Act No. 16-95) is less sweeping than the Rhode Island law.  Rather than prohibiting physician non-competes, the Connecticut law limits the allowable duration (to one year) and geographical scope (up to 15 miles from the “primary site where such physician practices”) of any new, amended or renewed physician agreement.  The new law also renders physician non-competes unenforceable if the physician’s employment or contractual relationship is terminated without cause.

Rhode Island and Connecticut are the latest in a slowly growing number of states that have taken legislative action to limit the use of physician non-competes.  Their neighbor Massachusetts was an early adopter of such a statute.  Mass. Gen. Laws chapter 112, §12X (enacted in 1977) bars physician non-competes which include any restriction of the right of a physician to practice medicine in any geographic area for any period of time after termination.  Much of the language in the Massachusetts law appears in the recently enacted Rhode Island statute.

Similar language appears in Delaware and Colorado statutes dating from the early 1980s, which state that covenants are void if they restrict the rights of physicians to practice medicine upon termination of the agreements containing the covenants.

More recently, Texas (in 1999) and Tennessee (in 2012) both enacted statutes (as did Connecticut) applying stricter standards to physician non-competes than are applicable to employee non-competes in general, while stopping short of invalidating such physician non-competes.

It remains to be seen if the enactment this summer of these statutes in Connecticut and Rhode Island is merely a coincidence, or foreshadows more state legislatures pursuing such limitations of physician non-competes.

No New Non-Compete Law for Massachusetts in 2016

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David J. Clark

David J. Clark

The Massachusetts legislature ended its 2015-2106 session on July 31, 2016, and lawmakers did not pass new legislation regarding non-compete agreements before doing so.

For the last few years, numerous efforts have been made in the Commonwealth to limit the use of non-compete agreements, resulting in several bills introduced in the Statehouse.  The latest bills, introduced in the House in June and the Senate in mid-July, would have set clear boundaries on the use of non-compete agreements by employers, including by establishing requirements that such non-compete provisions be signed and in writing, not exceed 12 months in duration, and be limited to geographic areas where the employee actually provided services. Another notable feature of the proposed bills was the incorporation of the concept of “garden leave” into non-compete provisions, in which an employer would be required to pay its former employee at least 50% of his or her pay, on a pro rata basis, during the non-compete period. The bills also would have prohibited judicial modification of non-competes and enforcement of non-competes against certain types of workers like students, interns, or fired employees.

As the legislative session drew to a close, however, legislators were unable to reach compromises upon issues such as whether and in what form garden leave might be allowed, and whether an employer and employee could agree upon a payment to support a non-compete entered at the termination of employment.

In this presidential election year, the Massachusetts legislature is adjourned until the start of a new session in January 2017. Renewed efforts to pass a non-compete bill in Massachusetts can be expected then.