When moving to enforce a non-compete, the last thing a litigator wants to do is to stumble out of the gates and struggle over a profound legal issue that could delay consideration of that normally urgent request. A new and little-talked-about section of the Defend Trade Secrets Act (DTSA), however, has the potential to trip up employers seeking to enforce non-competes if they are not prepared to address this new entanglement.
There has been a significant amount of commentary about the DTSA and its new amendments since President Obama signed the DTSA into law on May 11, 2016. The “whistle-blower” immunity and ex parte seizure order, for example, have generated the most discussion to this point. However, the section of the DTSA that may have the greatest future impact on litigation under the DTSA is 18 U.S.C. §1839(3)(A)(i)(1)(I), which prohibits injunctions that “prevent a person from entering into an employment relationship.”
That new provision, which I will refer to as the “No-Ban-on-Employment” provision, was intended to curb, if not eliminate, the use of the inevitable disclosure doctrine under the DTSA. However, it may have a significant unintended consequence–namely, it may complicate employers’ efforts to enforce non-competes through temporary restraining orders (TRO), the key legal mechanism for non-compete disputes. For the reasons below, employers may want to reconsider invoking the DTSA when they want to enforce their non-competes because of the potential complications of this section’s language and instead opt to file them in state court, at least in the short-term. As the DTSA is likely to overtake the Uniform Trade Secret Act (UTSA) as the dominant statutory regime for trade secret law, this DTSA provision may well set another blow in motion to the viability of the non-compete as an effective tool to protect trade secrets.
Quick Overview of the Legislative History: The “No-Ban-on-Employment” provision was inserted into the DTSA to address California Senator Diane Feinstein’s concerns over the potential use of the inevitable disclosure doctrine against California employees. California does not recognize the inevitable disclosure doctrine, a doctrine that allows courts in some instances to delay or even bar a former employee’s employment with a competitor because of fears that the employee will inevitably share or use his/her former employer’s trade secrets in a new competitive position. The doctrine is increasingly disfavored by courts and commentators and, as a practical matter, is rarely enforced by courts except in the most extreme circumstances (such as those found in the PepsiCo and Bimbo Bakeries cases, cases where the former employee had clearly demonstrated that he could not be trusted).
As readers of this blog know, the DTSA was the latest in a line of bills to add a federal trade secret claim for employers and companies going back to at least 2011. The “No Ban on Employment” amendment, however, did not surface until the DTSA was reintroduced in July 2015. The initial amendment had different language, prohibiting an injunction that would “prevent a person from accepting an offer of employment.” That language was broadened to the present language when the DTSA emerged from the Senate’s Judiciary Committee in late January 2016.
The Senate Judiciary Committee Report accompanying the DTSA is somewhat ambiguous on the new section. That report begins by emphasizing that “Section (3)(A)(i)(1)(I) reinforces the importance of employment mobility.” However, the report goes on to acknowledge that the inevitable disclosure doctrine may still be available if a state recognizes it, stating, “[s]ome courts have found, based on the information possessed by the employee alone, that an injunction may issue to enjoin a former employee from working in a job that would inevitably result in the improper use of trade secrets. Consistent with the overall intent of the Defense Trade Secret Act and, in particular, Section (2)(f), which provides that the bill does not “preempt any other provision of law,” the remedies provided in Section (3)(A)(i)(1)(I) are intended to coexist with, and not to preempt, influence, or modify applicable State law governing when an injunction should issue in a trade secret misappropriation matter.” The House Judiciary Committee Report on the DTSA echoes the same points about employee mobility but preserving existing state claim claims.
The Problem for Non-Competes: As a result of this language, under the DTSA, the inevitable disclosure doctrine will not be able to bar a former employee from working for a competitor as a matter of federal law. However, an employer may still request the more extreme application of the doctrine under state law in the event that its state recognizes it (although it may face some hurdles, a subject for a future blog post).
So why the fallout for non-competes? An employer should have the ability to enforce its contractual remedy independent of a federal statutory claim, right? Substantively and conceptually, that is absolutely correct. But it is not that simple. Unlike trade secret disputes, which can be highly factual and complicated, requests to enforce non-competes are clean, surgical and efficient. In most of the jurisdictions that recognize the enforcement of non-competes, so long as an employer can show a legitimate protectable interest and demonstrate the restriction is reasonable, that employer can generally move quickly to persuade a court to enforce the agreement, allowing an employer to reduce its cost and gain the certainty that accompanies a written agreement. TROs by their nature are well suited to these disputes.
However, TROs can be disrupted and defeated if an employee can cloud the legal issues or raise highly factual issues that complicate the process. If too much time passes, an employer faces a claim of laches or argument that the status quo has shifted so greatly that enforcement of a full-blown non-compete is no longer equitable or practicable. And any delay effectively undermines the non-compete’s central purpose, because the former employee will be able to continue to work for the competitor in the absence of an injunction.
For this reason the “No-Employment-Ban” restriction could complicate a TRO request in federal court. Again, employers will certainly – and correctly – argue that the No-Employment-Ban does not apply because they are enforcing a contract and solely relying upon that breach of contract claim for their underlying TRO request. Employees, however, can expected to argue, among other things, that having invoked the DTSA for jurisdictional purposes, an employer should be held to the DTSA’s limitations and they will emphasize the language of the statute, portions of the legislative history and its commitment to employee mobility.
Given the toxic legal environment that exists for non-competes right now (the infamous Jimmy John’s case, Senator Elizabeth Warren’s MOVE bill, non-compete reform that has spread throughout many states, etc.), some federal courts may gravitate to an employee’s position, creating confusion and a lack of clarity in the law, which is anathema to the precision necessary for a swift TRO application. For these reasons reason, and all things being equal, the safest bet for an employer may be to file in state court and avoid that unnecessary complication.
What about non-solicitation agreements? They should not be affected because their express purpose is to protect customer or employee goodwill and relationships, and not trade secrets. Even if the non-solicitation agreement did arguably implicate the protection of trade secrets, it should remain enforceable in most states (other than California for example) as the DTSA expressly authorizes a court to place limitations on employment to protect trade secrets.
Takeaways: At the end of the day, it should be remembered that non-competes are but one tool in the trade secret litigator’s shed. Non-disclosure agreements, creating a culture of confidentiality, training, sound data protection practices–all of these safeguards more frequently come into play in the protection of trade secrets.
Nevertheless, employers should be careful filing a non-compete request in a DTSA case until the law shakes out. While the No-Employment-Ban should not legally affect the right to enforce a covenant not to compete, employee mobility arguments and the potential for slowing down a TRO may persuade employers to opt for certainty and file their non-compete cases in state court to avoid that potential complication.