Featured on Employment Law This Week – An Illinois appellate court weighs in on social media and solicitation. The case involved a defendant who sent LinkedIn connection requests to three former coworkers, even though he had signed a non-solicit agreement. In considering whether social media activity violates non-solicitation agreements, other courts have drawn a distinction between passive social media activity and more active, direct activity. Though these requests were made directly to the former coworkers, the court in this case ruled that the content constituted passive activity because the defendant did not discuss his new job in any way, nor did he directly attempt to recruit his former coworkers. The court concluded that sending the connection requests did not violate the prohibition against inducing co-employees. Brian Spang, from Epstein Becker Green, has more:

“This particular agreement only prohibited direct inducement. It prohibited the employee from inducing other employees to leave. It could have and should have included a restriction against both direct and indirect inducement. This is important because the court pointed out in multiple places that the plaintiff did not present any evidence of ‘direct’ inducement. . . . I think that a non-compete or non-solicit agreement can specifically reference social media as a potential avenue for violation of the agreement.”

Watch the segment below and read our recent post on the topic.

In a very thorough analysis following a 3 day Preliminary Injunction hearing Judge Jed Rakoff declined to issue injunctive relief to a former employer seeking to enjoin four former employees and their new employer from competing or from soliciting clients or employees. The decision is far ranging in the employee movement context touching upon inadvertent retention of confidential information, the propriety of new employers providing broad indemnifications and large signing bonuses to the recruits,  and the scope of allowable “preparatory conduct” in a one year non-compete period, among other issues presented in the context of a group of employees in the eDiscovery services space collectively on the move.

Four senior sales executives of plaintiff Document Technologies Inc (“DTI”) collectively decided to leave DTI and signed new employment agreements with LDiscovery. LDiscovery provided the four with agreements that indemnified them from claims of improper conduct by DTI as well as significant signing bonuses to make up for lost compensation during the one year non-compete period they agreed to abide by. The Court found nothing wrong with these agreements and also that accepting employment and engaging in preparatory meetings and analysis of the marketplace were permissible preparatory acts and do not violate the non-competition prohibitions in their agreements with DTI. The Court also found that there was no breach of the employee non-solicit where the four employees coordinated their job search since they had each individually resolved to leave DTI in advance of coming together. Collectively reaching the conclusion to seek alternative employment was found not to be a breach of the employee non-solicit provisions each had in their agreement with DTI. The Court was skeptical that where the employees were all “at will” versus subject to a term contract, that the three prong test of enforceability under BDO Seidman could be met. The fact that they marketed themselves as a “package” deal was not unfair competition supporting a finding of breach. Similarly, LDiscovery could not be held liable for tortious interference by recruiting the team, providing them with signing bonuses and by indemnifying them.

This decision provides a good framework for legal analysis when determining the propriety of a team move and whether certain conduct of the employees and their new employer warrant injunctive relief.

Nevada employers be advised: on June 3, 2017, Governor Brian Sandoval signed into law Assembly Bill 276, which amends Chapter 613 of the Nevada Revised Statutes and sets forth a new framework in which noncompetes are evaluated. The amended law includes the following four changes:

  1. A noncompete is void and unenforceable unless the noncompete:
    1. Is supported by valuable consideration;
    2. Does not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed;
    3. Does not impose any undue hardship on the employee; and
    4. Imposes restrictions that are appropriate in relation to the valuable consideration supporting the noncompete.
  2. A noncompete may not restrict a former employee of an employer from providing service to a former customer or client if:
    1. The former employee did not solicit the former customer or client;
    2. The customer or client voluntarily chose to leave and seek services from the former employee; and
    3. The former employee is otherwise complying with the limitations in the noncompete as to time, geographical area and scope of activity to be restrained, other than any limitation on providing services to a former customer or client who seeks the services of the former employee without any contact instigated by the former employee.
  3. When an employee is terminated as the result of a reduction of force, reorganization or similar restructure of the employer, a noncompete is only enforceable during the period in which the employer is paying the employee’s salary, benefits or equivalent compensation (including severance pay).
  4. If an employer brings an action to enforce a noncompete and the court finds that it is supported by valuable consideration but (a) contains limitations as to time, geographical area or scope of activity to be restrained that are not reasonable, (b) imposes a greater restraint than is necessary for the protection of the employer and (c) imposes undue hardship on the employee, then the court must revise or “blue pencil” the noncompete to the extent necessary and enforce it as revised. Such revisions must render the limitations reasonable and no greater than is necessary for the protection of the employer.

Key Takeaways

The legislation does not clarify the meaning of the term “valuable consideration.” Such guidance will likely come from the courts as Nevada employees and employers litigate what is meant by the term, although it appears that an at-will employee’s continued employment in and of itself will not be considered sufficiently “valuable” under the law. In the meantime, without the benefit of legislative or judicial guidance, Nevada employers should assess whether an employee subject to a noncompete has received adequate consideration, particularly in relation to the restriction that is being imposed in the noncompete.

The legislation is also notable in that it reverses a prohibition on judicial blue penciling that was established by the Nevada Supreme Court in a 2016 decision, Golden Road Motor Inn, Inc. d/b/a Atlantis Casino Resort v. Islam and Grand Sierra Resort, 376 P.3d 151 (Nev. 2016). Nevada courts are now required to modify or “blue pencil” overbroad noncompetes to the extent necessary to render them enforceable. Although Nevada employers with an overbroad noncompete can take comfort knowing that the noncompete will not simply be discarded, they should nevertheless revise their noncompetes so that they impose restrictions in terms of time, geographical area and scope of activity that are reasonable.

In this age of social media, a frequently asked question is whether social media activity can violate a non-compete or non-solicit.   Although the case law is evolving, courts which have addressed the issue have focused on the content of the communication, rather than the medium used to convey it.  In so doing, they have distinguished between mere passive social media activity (e.g., posting an update about a new job) as opposed to more targeted, active actions (e.g., not merely posting about a new job, but also actively recruiting former co-workers or clients).

A “LinkedIn” case recently decided by the Illinois Appellate Court, Bankers Life v. American Senior Benefits, involved conduct which fell between these two extremes: an individual, Gregory P. Gelineau, who was contractually barred from soliciting former co-workers, sent three former co-workers  generic requests to become “connections” via LinkedIn.  The requests did not go further than that, but they were not purely passive in that they sent to specific individuals.  Gelineau’s former employer, Bankers Life, filed suit, accusing him of breaching his non-solicitation obligation.

After surveying decisions from around the country involving various forms of social media activity, the Court explained that the different results reached in these decisions “can be reconciled when looking at the content and the substance of the communications.” Here, the Court noted that the LinkedIn requests sent by Gelineau did not discuss Bankers Life or Gelineau’s new employer, did not suggest that the recipient view Gelineau’s new job description, and did not encourage the recipient to leave Bankers Life and join Gelineau’s new employer.  Rather, they were bare requests to become “connections” on LinkedIn.

The Court held that such bare requests were not the sort of direct, active efforts to recruit which would have been a breach of Gelineau’s contractual non-solicitation clause.

While the facts of Bankers Life fall in between the two extremes of social media activity addressed by other courts, the case ultimately turned on an evaluation of the content of the activity, as opposed to the medium.  This approach is consistent with that taken by courts whenever they are tasked with determining whether particular conduct constitutes an unlawful “solicitation.”

A recent decision from the Northern District of California, Magic Leap, Inc. v. Bradski et. al., shows that employers must meet a high standard when filing a California Code of Civil Procedure Section 2019.210 disclosure statement under the California Uniform Trade Secrets Act (“CUTSA”). See California Civil Code § 3426 et seq. The disclosure statement, which does not have a counterpart in the federal Defend Trade Secrets Act, requires a plaintiff to “identify the trade secret with reasonable particularity” before it can conduct discovery of the defendants’ evidence. See California Code of Civil Procedure § 2019.210. The sufficiency of these disclosure statements is often hotly contested in litigations under CUTSA.

While there is no bright-line rule governing how much specificity should be in a Section 2019.210 disclosure statement, courts have explained that the trade secret must be described with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant and the court to ascertain the boundaries within which the secret lies. See Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc. (2014) 226 Cal.App.4th 26, 43-44. The Northern District’s Magic Leap decision reinforces the importance of emphasizing a trade secret’s novelty in a Section 2019.210 disclosure statement under the CUTSA.

As described in its pleading, Magic Leap is a start-up that is developing a “head-mounted virtual retinal display, which superimposes 3D computer-generated imagery over real world objects.” It brought suit against two former high-level employees and their venture, alleging misappropriation of its trade secrets, among other claims. When Magic Leap submitted its latest Section 2019.210 disclosure, defendants Adrian Kaehler and Robotics Actual, Inc. moved to strike, contending that Magic Leap provided only vague, conceptual descriptions of its technology, and merely described well-known, well-studied, and obvious issues in highly technical fields. Magic Leap argued that, among other things, the defendants confused Section 2019.210’s disclosure requirement with litigating the ultimate merits of the case. It also argued that the defendants confused trade secrets with patents, which must be novel and inventive.

On June 9, 2017, a California federal magistrate judge granted the defendants’ motion to strike, ruling that Magic Leap’s disclosures “in totality fail to disclose the asserted trade secrets with ‘reasonable particularity.’” The judge allowed Magic Leap to amend its disclosures in order to identify its asserted trade secrets with greater specificity.

Although at this time the magistrate judge’s reasoning in Magic Leap is not public record, the ruling is another example of a court requiring a more exacting level of particularity from plaintiffs bringing a CUTSA claim. The ruling also emphasizes that, even if extensive measures are taken to protect information, the novelty of the underlying trade secret may affect a court’s analysis of the viability of a CUTSA claim. Tips for employers to prevent and protect against trade secret misappropriation in California were recently discussed in EBG’s Take 5 Newsletter.

While agreements that restrict employees from leaving a job and working for a competitor (commonly known as “non-compete” agreements) are standard in many industries, they are relatively scarce in the media and journalism sectors. Outside of television companies restricting star talent, and media companies restricting executives, it has rarely been common practice for journalists to be subject to non-compete restrictions.  However, it appears that may be changing.

Citing the common reasons that are often put forth for non-compete clauses, two online based news companies founded in 2012 are now incorporating non-competes into their contracts. NowThis (a social news company that was co-founded by the executive chairman of BuzzFeed, a co-founder of the Huffington Post with Ariana Huffington) and the Independent Journal Review (an opinion and news website founded by former Republican staffers) have both made news in the last month for inserting broad non-compete clauses into new hire contracts.

The Independent Journal Review clause bars employees from working at “any competing business” “anywhere in the world” for six months prior to departure. Competing businesses are defined as any business that is involved in the practice of publishing news content.  The NowThis clause appears to be a bit more narrow.  It bars employees from working at a specified list of news media companies, including CNN, BuzzFeed, and Conde Nast.

Both of these companies may have trouble enforcing their non-compete provisions. In recent years, as companies invest more in their new hires, it has become common to try to use non-competes to prevent competitors from poaching employees and benefiting from that investment.  There has been a corresponding rise in regulation and backlash on the part of those who believe this to be an unnecessary and even harmful tactic.  For example, the state of California has banned the use of non-compete clauses in nearly all circumstances, and other states have seen judges increasingly refuse to enforce non-compete clauses. In the state of New York, the Attorney General’s office has even gone after media companies (e.g. Law360) for the use of non-compete clauses.

What Should Employers Do Now?

As this back and forth between employers and employees (frequently with the state on their side) continues to play out, it is best for employers to ensure that, if they include a non-compete clause in their standard contracts, that it is narrowly tailored in scope and geography to ensure that it is most likely to be enforced. As always, it is best to be cognizant of each applicable state law and craft employment agreements accordingly.

Consider the following scenario that was the premise of the book Charlie and the Chocolate Factory (1964), and later adapted into the classic film Willy Wonka & the Chocolate Factory (1971): your company (Willy Wonka Chocolates) is in the candy business and develops an idea for an everlasting gobstopper (a sucking candy that never gets smaller).  Anticipating substantial profits from the product, the company designates the everlasting gobstopper formula as a trade secret.  As in the book and film, a rival chocolate company (Slugworth Chocolates) seeks to steal the trade secret formula in order to develop and market a competing gobstopper.

While Charlie and the Chocolate Factory is premised on a local competitor seeking to steal trade secrets for its own business, this post focuses on an adaptation to the story based in today’s global economy, and more specifically, the actions a company may take within the United States and abroad to protect against trade secret misappropriation.

Most U.S. companies are now aware of the protections afforded by the Defend Trade Secrets Act of 2016, 18 U.S.C. §§ 1836, et seq. (the “DTSA”).  Of most importance is that the DTSA created a uniform legislation that provides companies with a private civil cause of action for trade secret misappropriation.  As a result of enactment of the DTSA, a company that is the victim of trade secret theft has standing to file a civil suit in federal court.  The company may also report the theft to the United States Department of Justice because, in certain cases, the theft of trade secrets constitutes a crime under the federal Economic Espionage Act, 18 U.S.C. §§ 1831, et seq. (the “EEA”).

Due to jurisdictional limitations, however, the DTSA and EEA may not provide adequate protection when there has been a misappropriation of trade secrets in the international arena. Companies should, therefore, be aware of other methods to protect against trade secret misappropriation abroad.  One method is through the United States International Trade Commission (the “ITC”), an independent, quasi-judicial federal agency with broad investigative responsibilities on matters of trade. Pursuant to the Smoot-Hawley Tariff Act of 1930 (the “Act”), the ITC has jurisdiction to investigate and can render unlawful, the importation of goods stemming from “unfair methods of competition and unfair acts in the importations of articles … in the United States.”  The ITC has determined that trade secret misappropriation is a form of unfair competition that is protected under Section 337 of the Act, and the United States Courts of Appeals for the Federal Circuit has affirmed this interpretation in two separate cases. See Sino Legend Chemical Co. v. ITC, 623 Fed. Appx. 1016 (Fed. Cir. 2015), cert. denied, 196 L. Ed. 2d 517 (2017); TianRui Group Co. Ltd. v. ITC, 661 F.3d 1322, 1327 (Fed. Cir. 2011).

In Sino Legend Chemical Co., employees had been working for a U.S.-based company at a facility in China.  The employees stole trade secrets from the company and brought them to Sino Legend Chemical Co., a competitive Chinese company that began developing a competitive product and sought to sell it in the United States.  The U.S. company filed a complaint with the ITC, and after investigation, the ITC instituted a 10-year ban on the importation of products resulting from trade secret misappropriation that had occurred entirely outside the United States.  On appeal, Sino Legend urged the Federal Circuit to overturn the ITC’s decision, arguing that Section 337 of the Act should not apply because the trade secret misappropriation occurred entirely outside the United States.  The Federal Circuit disagreed and affirmed the 10-year ban instituted by the ITC, and in 2017, the United States Supreme Court declined review.

A company should be aware that even if a theft of trade secrets occurs abroad, the company may seek relief through the ITC to prevent the importation of competitive products into the United States that are developed as a result of the stolen trade secrets. Of course, relief through the ITC is limited because the ITC cannot stop the offending company that stole the trade secrets from marketing a competitive product in countries outside the U.S.  There remain, however, other methods to protect against the misappropriation of trade secrets abroad.

Similar to the DTSA, the European Union (“EU”) enacted its own framework for the protection of trade secrets via a directive that went into effect on June 8, 2016. The EU directive provides protection of “undisclosed know-how and business information against their unlawful acquisition, use and disclosure.”  Although the EU directive does not establish criminal sanctions, it does provide for civil means through which victims of trade secret misappropriation can seek protections, such as: (i) allowing for temporary restraining orders and injunctive relief; (ii) removal from the market of goods manufactured based on stolen trade secrets, and (iii) monetary damages.  Pursuant to the EU directive, each member country must incorporate the required provisions into its laws by June 9, 2018.  Importantly, the EU directive contains only the minimum requirements for the protection of trade secrets; however, each EU member country may elect to enact stronger protections.  It remains to be seen whether the EU countries will enact provisions more stringent than the EU directive.

Companies need to protect themselves from the Slugworths of the world. In Charlie and the Chocolate Factory, Slugworth was a local competitor that sought to steal Willy Wonka’s trade secrets, but in today’s global economy, Slugworth can steal trade secrets from anywhere and can also market competitive products throughout the globe.  As a result, companies need to be well versed in the various global protections against misappropriation of trade secrets.  Use of counsel knowledgeable of these various protections is critical to ensure that all avenues of relief are considered.

With the law’s first anniversary in the rear view mirror, defendants have established a viable defense to claims arising under the Defend Trade Secrets Act (“DTSA”) – a plaintiff may be precluded from bringing a claim under DTSA if it only alleges facts that show acts of misappropriation occurring prior to May 11, 2016 (the date of DTSA’s enactment).   In the last few months, four different courts have tackled this “timing defense,” and defendants raising it in motions to dismiss DTSA claims have encountered mixed results.

In Brand Energy & Infrastructure Servs. v. Irex Contr. Grp., No. 16-cv-2499, 2017 U.S. Dist. LEXIS 43497 (E.D. Pa. Mar. 23, 2017), a Pennsylvania federal court rejected the defendants’ attempt to invoke the timing defense because the plaintiff’s amended complaint alleged various times after the enactment of the DTSA that the defendants “used” the plaintiff’s alleged trade secrets.  The court also noted the plaintiff’s inclusion of allegations in the amended complaint showing that “to this day, the defendants continue to ‘obtain access to [its] confidential and proprietary business information ….”  Based on this pleading, the court held that the plaintiff could pursue its DTSA claim.  Similarly, in AllCells, LLC v. Zhai, Case No. 16-cv-07323, 2017 U.S. Dist. LEXIS 44808 (N.D. Cal. Mar. 27, 2017), a California federal court denied the defendants’ motion to dismiss a DTSA claim because “even if [defendants] copied and thus acquired the alleged trade secrets before May 11, 2016, [the plaintiff] has sufficiently alleged that there was at least use of the trade secrets after that date.  Hence, the Act applies.”

In Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 16-cv-03545, 2017 U.S. Dist. LEXIS 71700 (N.D. Ill. May 11, 2017), a plaintiff’s DTSA claim survived dismissal, overcoming the defendant’s argument that “no acts occurred after the effective date of the Act.”  The court held that the plaintiff’s allegations regarding the inevitable post-enactment disclosure of its trade secrets to the defendant by its former employee were sufficient to state a plausible DTSA claim:  “[i]f it is plausible that some of the alleged trade secrets maintain their value today, then it is also plausible that [defendant] would be continuing to use them.”  The court noted, however, that further discovery would be needed to determine whether post-enactment disclosure of the trade secrets was in fact inevitable.

By contrast, a California federal court granted a defendant’s motion to dismiss where a complaint lacked sufficient allegations regarding the timing of the alleged appropriation in Cave Consulting Grp., Inc. v. Truven Health Analytics Inc., No. 15-cv-02177, 2017 U.S. Dist. LEXIS 62109 (N.D. Cal. Apr. 24, 2017).  In Cave, the plaintiff alleged that the defendant acquired trade secrets and used them in a 2014 client meeting, but that conduct predated the enactment of the DTSA.  The court held that plaintiff had failed to make any “specific allegations that defendant used the alleged trade secrets after the DTSA’s May 11, 2016 enactment.”  Because the plaintiff failed to allege that any “postenactment use occurred,” the plaintiff had not stated a plausible DTSA claim.

These decisions illustrate that the likelihood of success of the timing defense largely is a matter of drafting, and provide an important takeaway for both sides of a trade secrets dispute. A plaintiff should be mindful in drafting its pleading to include factual allegations showing that the defendant’s misappropriation occurred (or inevitably will occur) after DTSA’s enactment.  The defendant, on the other hand, should carefully scrutinize the complaint to determine whether a timing defense applies.

Peter A. Steinmeyer and Lauri F. Rasnick, Members of the Firm in the Employment, Labor & Workforce Management practice, in the firm’s Chicago and New York offices, respectively, co-authored an article in Thomson Reuters Practical Law, titled “Garden Leave Provisions in Employment Agreements.”

Following is an excerpt (see below to download the full article in PDF format):

In recent years, traditional non-compete agreements have come under increasing judicial scrutiny, with courts focusing on issues such as the adequacy of consideration, the propriety of non-competes for lower level employees, and whether the restrictions of a noncompete are justified by a legitimate business interest or are merely a tool used to suppress competition.

Although the Trump Administration’s attitude toward non-compete agreements is unknown, the Obama Administration was disapproving of them. Both the US Department of Treasury and the White House issued reports in 2016 that questioned the widespread use of non-competes and suggested that they hampered labor mobility and ultimately restrained economic growth (see US Department of the Treasury: Non-Compete Contracts: Economic Effects and Policy Considerations (Mar. 2016) and White House Report: Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses (May 2016)). Some states have passed legislation essentially banning non-competes for certain categories of workers, such as low-wage workers in Illinois (820 ILCS 90/1) and technology sector workers in Hawaii (Haw. Rev. Stat. § 480-4(d)). In other states, such as California, almost all post-employment non-competes are unenforceable (Cal. Bus. & Prof. Code § 16600-16602.5).

With this background, employers are seeking alternatives to traditional non-compete agreements to protect their proprietary information and customer relationships. …

Download the full article in PDF format.

California has always been a challenging jurisdiction for employers in terms of limiting unfair competition by former employees and protecting trade secrets. However, employers in the state can significantly enhance their ability to protect their business interests in these areas with a little planning and strategic thinking.

In this issue of Take 5, we look at some proactive steps that employers can take to prevent unfair competition by departed employees and protect trade secrets from misappropriation:

Read the full Take 5 online or download the PDF.