Non-Compete Enforceability

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As many of you know from my post last week, the Federal Trade Commission (FTC) just proposed a ban on noncompetes with virtually no exceptions. And, the FTC has also placed nondisclosure agreements (NDAs) in its crosshairs.

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December was unusually busy and 2023 started with a bang courtesy of the Federal Trade Commission’s (FTC) proposed rule banning noncompetes.  Here are the noteworthy cases and posts from last month, with several notable posts regarding the FTC’s big announcement on Thursday, for good measure:

Noteworthy Defend Trade Secrets Act Cases, Federal Trade Secrets Opinions and Related Commentary:

  • Courts continue to scrutinize claims of irreparable injury in trade secret cases, and no court runs a tighter ship than the U.S. District Court for the Southern District of New York.  In Tomgal LLC v. Castano, District Court Judge John Koeltl of the U.S. District Court for the Southern District of New York denied an injunction request, reasoning that irreparable injury did not exist because any injury arising from the misappropriated trade secrets could be easily calculated.  Judge Koeltl found “every unit of inventory that [defendant] Fashion Code sells to a Robin Ruth distributor is a sale that Robin Ruth did not make,” i.e., profits from the sale of the products containing the misappropriated trade secrets could be easily monetized. Judge Koeltl also rapped the plaintiff’s knuckles on laches grounds, finding that a 7-month delay was substantial and unreasonable.
  • If you don’t identify your trade secrets with particularity, you are not going to get an injunction.  That is the simple message that many federal courts are sending to trade secret owners, and a recent decision by District Court Judge Nugent of the U.S. District Court for the Northern District of Ohio is the latest. To date, most of the discussion regarding trade secret identification has been at the discovery stage but now courts are reinforcing that message by denying early requests for an injunction. In Collar Jobs, LLC v. Slocum, Judge Nugent denied the request for an injunction against a former joint venture partner, expressing concern that “it is not entirely clear what Collar Jobs’ ‘trade secret’ is.”   He also questioned the novelty of the alleged “platform” trade secret before him, which appeared to be a combination trade secret of customer and prospect data.
  • So Judge Nugent’s opinion begs the following question: should the DTSA be amended to include a requirement that trade secret identification is provided early in a case?  In an article for Law360, Willenken LLP’s Amelia Sargent details recent rulings by the U.S. Courts of Appeal for the Seventh Circuit and Ninth Circuit recognizing the need for identification and advocates for that amendment.  It’s a good read and Amelia’s points are reasonable and sound.
  • A recent decision out of Massachusetts cuts against the trend of decisions broadly interpreting the extraterritorial reach of the DTSA.  In Sysco Machinery Corp. v. Cymtek Solutions, Inc., District Court Judge Leo Sorokin of the U.S. District Court for Massachusetts ruled the sale of products in the U.S. that were made using the alleged trade secrets, without more, did not qualify as “an act in furtherance” of misappropriation under the DTSA.  According to Judge Sorokin, the defendant Cymtek used the misappropriated trade secrets improperly to make competing machines in Taiwan, but all of that conduct occurred in Taiwan or outside the United States; as a result, on this record, he found that there was neither “misappropriation” in the United States nor an “act in furtherance of the offense . . . committed in the United States” as required under §1837(2) of the DTSA.  Contrast this ruling to the decisions described in my September 2021 post.  Tough to reconcile in my judgment.

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Continue Reading Monthly Wrap Up (January 9, 2023): Noteworthy Trade Secret and Restrictive Covenant Posts, Cases and Developments

Earlier today, the Federal Trade Commission announced it has issued a proposed rule banning noncompetes. This development should come as no surprise since President Biden issued an executive order in July 2021 authorizing the FTC and other agencies to investigate the unfair use of noncompetes and other restrictive covenants and curtail their use. I expect that most of the commentary will focus on noncompetes and the ability of the FTC to effectively legislate over a body of law reserved for the states for over a hundred years. However, what should be of particular concern to the trade secret community is that the proposed FTC rule also potentially targets nondisclosure agreements (NDAs) that are “written so broadly” as to amount to “de facto noncompetes.” In other words, employers in California, Oklahoma and North Dakota–states that forbid noncompetes–may find that their employee NDAs could qualify as de facto noncompetes under the FTC’s new rule. As explained below, this post briefly describes how we got here, what the proposed rule addresses, and suggests some actions employers can take to protect themselves in the meantime.…

Continue Reading It’s Official: The Federal Trade Commission Seeks to Ban Noncompetes and Overly “Broad” NDAs

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And away we go:

Noteworthy Defend Trade Secrets Act Cases, Federal Trade Secrets Opinions and Related Commentary:

  • If an employer presents specific evidence that former employees emailed, printed out or took copies of customer lists, is that sufficient evidence to establish that those former employees misappropriated those trade secrets for purposes of defeating summary judgment?  In Busey Bank v. Michael G. Turnery, et al., U.S. District Court for the Northern District of Illinois Judge Sara Ellis concluded that it was not enough since “mere possession of trade secrets does not suffice to plausibly allege disclosure or use of those trade secrets, even when considered in conjunction with solicitations of former clients.”  A link to the opinion can be found here, and Law360′s article on the case can be found here.  The opinion is interesting to me in two respects:  (1) it is consistent with an emerging trend requiring direct, rather than circumstantial, proof of misappropriation (see my earlier post on the Wisk Aero v. Archer Aviation case and on other federal cases finding that mere downloading isn’t enough for an injunction); and (2) reading between the lines, it seemed like Judge Ellis saw this case as an employee “raiding case” masquerading as a trade secrets case.
  • Although most trade secret disputes arise in the employer/employee relationship, a recent opinion by the U.S. Court of Appeals for the Second Circuit serves as a reminder that the contours of trade secret law are often shaped by disputes in the public records context.  In a post for Crowell’s Government Contracts Legal Forum, John McCarthy, Anuj Vohra and Daniel Wolff describe the decision that better defined what degree of competitive harm needs to be presented to support a trade secret invocation under the 2016 FOIA Improvement Act.
  • Discovery disputes are common in trade secret litigation because of the nature of information at issue (i.e., highly sensitive trade secrets) and the potential intrusiveness of some of the types of discovery (imaging and forensic analysis of personal devices).  However, a defendant’s continued resistance and non-compliance with discovery requests and court orders led to the rarest of sanctions–a default on the merits.  In RedWolf Energy Trading, LLC v. BIA Capital Management, LLC, et al., the U.S. District Court for the District of Massachusetts imposed this sanction against the individual defendant and his company.  Erik Weibust details the court’s 72-page decision for Epstein Becker’s Trade Secrets & Employee Mobility Blog.  Erik’s post highlights the fact that the defendant tried to save costs on a discovery vendor (blaming him for its failure) and is now on the hook for more than $10 million in damages.
  • And the U.S. District Court of Massachusetts is not the only court that has issued terminating sanctions against a party for failing to abide by discovery obligations and court orders.  For a comprehensive list of spoliation cases involving requests for severe sanctions, check out Arent Fox’s Linda Jackson, Matthew Prewitt, Taniel Anderson, Nadia Patel and Pascal Naples’ article for The National Law Journal describing multiple cases over the past 3 years in which courts have imposed severe sanctions on recalcitrant parties.
  • Speaking of discovery disputes, there is an interesting decision coming out of the Wisk Aero v. Archer Aviation case in the U.S. District Court for the Northern District of California (for more on that case and its well-reasoned decision denying a preliminary injunction, see my post from last year).  U.S. District Court Judge Orrick affirmed the ruling of Magistrate Judge Donna Ryu that permitted the individual defendants accused of trade secret theft in that case to review the trade secrets at issue; frankly, given the need for a defendant to evaluate the trade secret claims against it, it never fails to amaze me that employers and trade secret owners resist these types of disclosures.  However, the most interesting feature of the Magistrate’s order is that each defendant was only allowed to view the trade secret for 15 minutes.  Jim Pooley briefly touches on this dispute in a post he wrote for The IP Watchdog as he describes the many situations where courts have to balance competing policies and interests in trade secret litigation.
  • Steve Brachman has a post for the IP Watchdog on the viability of an argument that the DTSA’s policy supporting federal protection for trade secrets trumps a forum selection clause directing litigation to Denmark.  In Amyndas Pharmaceuticals, S.A. v. New Zealand Pharma AS, the U.S. Court of Appeals for the First Circuit rejected that and other arguments and shipped the case out to a Danish court.  The First Circuit made short work of the argument that the terms “defendants’ venue” meant anything other than the corporate headquarters of that defendant, reasoning any other interpretation would render the phrase meaningless.  Dennis Crouch also has a post on the decision for the Patently-O blog.

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Continue Reading Monthly Wrap Up (October 5, 2022): Noteworthy Trade Secret and Restrictive Covenant Cases, Developments and Posts

As he promised during the 2020 presidential campaign, President Joe Biden issued an Executive Order on Friday that directs the Federal Trade Commission (FTC) to curtail the use of unfair non-competes or other agreements that may limit employee mobility.  This Executive Order is the culmination of efforts by federal legislators to ban or limit non-competes.  A number of bills have been brought to the floor of the U.S. Senate, mostly by Democratic Senators, and none of been able to marshal sufficient bipartisan support to advance.   As those legislative efforts fizzled, several of those senators then lobbied the FTC to ban non-competes, which in turn held hearings over whether to take regulatory action early last year.

As explained in greater detail below, the Biden Executive Order is short on detail and simply encourages the FTC to take unspecified action against unfair non-competes and other agreements limiting employee mobility.  On its face, the Executive Order focuses on “unfair” agreements which have generally been understood to mean non-competes imposed on lower-wage workers.  Should, however, the FTC take a more aggressive approach to ban all non-competes, that could harm one of the key drivers of employment in the U.S. — small and medium-sized businesses that more heavily rely on non-competes to protect their companies.
Continue Reading The Biden Executive Order Seeking to Curtail Non-Competes: Why It May Be Bad for Small Companies

In this episode, Ben Fink, Russell Beck, and I provide some basics on what noncompetes and other restrictive covenants are, how they are enforced, how the law involving these agreements has been changing, and the legislative and regulatory changes companies and employees can expect from state and federal levels in the near future.…

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The economic carnage unleashed by the COVID-19 virus has disrupted virtually every industry in the United States.  At last count, more than 38 million workers had lost their jobs and made claims for unemployment benefits.  And while states have begun easing restrictions on the ability of many businesses to reopen, it is reasonable to expect there will be further turnover, leading to the departure of many employees to competitors.  Feeling more vulnerable because of the downturn, employers will inevitably look to enforce restrictive covenants, including non-competes and non-solicitation agreements, against those former employees.  How will courts tend to handle requests to enforce restrictive covenants, especially non-competes, in this difficult economy?  One guide may be looking at how they handled similar requests during the last economic downturn in 2008 in the state of Ohio.
Continue Reading Back to the Future: Do Restrictive Covenant Cases from the 2008 Recession Offer Clues to How Courts Will Rule in the Aftermath of COVID 19?

No Solicitation

Most employee restrictive covenant disputes arise as a result of an employer’s concern about the potential loss of customer relationships and customer goodwill.  These disputes generally involve sales representatives or high level business executives that have relationships with key customers; these disputes also frequently involve defenses that the employees had pre-existing business relationships with the customers that should fall outside the non-compete or non-solicitation agreement at issue.  These disputes can be very fact-driven and the subject of very different recollections.  For these reasons, non-solicitation cases can be especially messy.  Unfortunately, a recent case out of the U.S. Court of Appeals for the Sixth Circuit, Hall v. Edgewood Partners Insurance Center, Inc., Case No. 18-3481/3482, highlights a doctrine — that an employee has rights to clients he/she acquired on his/her own time and dime — that may make these cases more complicated, expensive and problematic.
Continue Reading Whose Customer Is It Anyway? The Sixth Circuit Further Clouds New York’s Already Murky Law on Non-Solicitation Agreements

As you will see, I have changed the format of my monthly wrap up post in two ways.  First, I am going to start including links to noteworthy decisions that I come across or are forwarded to me.  Unfortunately, since neither I nor other bloggers writing in this space can cover everything, this will be a useful feature for those practicing in this area.  Second, I am going to provide more commentary on some posts and cases, in the hope of creating further dialogue on many trade secret and non-compete issues.  Given the hot button nature of some of these issues, I am going to share my thoughts, for whatever they are worth.  Now, on to posts and links from the last month:

Legislative Developments

  • Last week, Democratic Senators Elizabeth Warren, Chris Murphy and Ron Wyden announced their intention to introduce the Workers Mobility Act (WMA) that would abolish non-competes throughout the United States.  As many of you will recall, Senator Murphy previously introduced a similar bill, the Mobility and Opportunity for Vulnerability Employees Act (MOVE) but that bill stalled on the Senate floor.  Russell Beck has a post with a link to the House and Senate bills, along with his well-reasoned concerns about the breadth and scope of the bills.
  • A blog post about legislation over non-competes wouldn’t be complete if there wasn’t some mention of some activity in Massachusetts.  Key features of the latest bill under serious consideration would limit non-competes to 12 months (unless the employee stole trade secrets or breached his fiduciary duty) and finally adopt the UTSA.  For more details, see Russell Beck’s post in his Fair Competition Blog.
  • Idaho (repealing its recent changes in 2016) and Utah (restricting their use against broadcasters) have recently amended their statutes addressing restrictive covenants.  See Russell Beck again.
  • Colorado has modified its law affecting physician non-competes, carving out protections for physicians treating patients with rare genetic disorders to eliminate any interruption of care for those patients.  Peter Greene summarizes the changes in Epstein Becker’s Trade Secrets & Employee Mobility Blog.

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Continue Reading Monthly Wrap Up (May 8, 2018): Noteworthy Trade Secret and Non-Compete Cases, Developments and Posts