Throughout 2015, Seyfarth Shaw’s dedicated Trade Secrets, Computer Fraud & Non-Competes Practice Group hosted a series of CLE webinars that addressed significant issues facing clients today in this important and ever-changing area of law. The series consisted of nine webinars:
- 2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete and Computer Fraud Law
- Protecting Confidential Information and Client Relationships in the Financial Services Industry
- International Trade Secrets and Non-Compete Law Update
- Employee Social Networking: Protecting Your Trade Secrets in Social Media
- How and Why California is Different When It Comes to Trade Secrets and Non-Competes
- State Specific Non-Compete Oddities Employers Should Be Aware Of
- So You Want An Injunction in A Non-Compete or Trade Secret Case?
- Social Media Privacy Legislation Update
- Enforcing Non-Compete Provisions in Franchise Agreements
As a conclusion to this well-received 2015 webinar series, we compiled a list of key takeaway points for each program, which are listed below. For those clients who missed any of the programs in this year’s series, the webinars are available on CD upon request, or you may click on the title below each webinar for the online recording. We are pleased to announce that Seyfarth will continue its trade secrets webinar programming in 2016, and we will release the 2016 trade secrets webinar series topics in the coming weeks.
The first webinar of the year, led by Michael Wexler, Robert Milligan and Daniel Hart, reviewed noteworthy cases and other legal developments from across the nation in the areas of trade secret and data theft, non-compete enforceability, computer fraud, and the interplay between restrictive covenant agreements and social media activity, and provided predictions for what to watch for in 2015.
- As demonstrated by high-profile hacking attacks and criminal prosecutions for trade secrets theft, companies’ trade secrets are at greater risk today than ever before. To mitigate the risk of trade secrets theft, companies should review their security procedures, policies on IT resources and email usage, and employee exit interview/termination processes to ensure that the company’s assets are adequately protected.
- Use of social media continues to generate disputes. As more and more states adopt social media privacy laws, companies increasingly seek to assert an ownership interest in work-related social media accounts. Additionally, as the NLRB cracks down on social media policies that prohibited employees from engaging in protected activities, employers should periodically review their policies regarding use of social media in the workplace.
- Courts and regulatory agencies continue to scrutinize non-competes and other restrictive covenants. In light of these and other continuing developments in non-compete law, employers should periodically review their existing agreements and on-boarding procedures to maximize the likelihood that their agreements will be upheld. To learn more, please see our 50 State Non-Compete and Trade Secrets Desktop Reference.
The second installment, led by Scott Humphrey, Jason Stiehl and James Yu, focused on trade secret and client relationship considerations in the banking and finance industry, with a particular focus on a firm’s relationship with its FINRA members.
- Enforcement of restrictive covenants and confidentiality obligations for FINRA and non-FINRA members are different. Although FINRA allows a former employer to initially file an injunction action before both the Court and FINRA, FINRA—not the Court—will ultimately decide whether to enter a permanent injunction and/or whether the former employer is entitled to damages as a result of the former employee’s illegal conduct.
- Address restrictive covenant enforcement and trade secret protection before a crisis situation arises. An early understanding of the viability of your company’s restrictive covenants and the steps your company has taken to ensure that its confidential information remains confidential will allow your company to successfully and swiftly evaluate its legal options when a crisis arises.
- Understand the Protocol for Broker Recruiting’s impact on your restrictive covenant and confidentially requirements. The Protocol significantly limits the use of restrictive covenants and allows departing brokers to take client and account information with them to their new firm.
In the third installment, attorneys Wan Li, Ming Henderson and Daniel Hart focused on non-compete and trade secret considerations from an international perspective. Specifically, the webinar involved a discussion of non-compete and trade secret issues in Europe and China as compared to the United States. This webinar provided valuable insight for companies who compete in the global economy and must navigate the legal landscape in these countries to ensure protection of their trade secrets and confidential information, including the effective use of non-compete and non-disclosure agreements.
International…Local Law Compliance is Key
- One size does not fit all! Requirements for enforceable restrictive covenants vary dramatically from jurisdiction to jurisdiction. However, there are some common requirements and issues regarding enforceability based on the region (e.g., in Europe; see below). Bearing in mind non-compete covenants across the world may be unlawful in certain countries or heavily restricted, employers should carefully tailor agreements to satisfy local legal requirements and appropriately apply local drafting nuances to aid enforceability of any restrictive covenants.
- The general approach to restrictive covenants in Europe is that the restrictions should not go further than is reasonably necessary to protect the employer’s legitimate business interests. This restrictive approach is a continuing trend across Europe. For example, there is a recent prohibition in the Netherlands on non-compete clauses in fixed-term contracts unless justified by the special interests of the company. In practice, this means that employers should particularly focus on the duration and scope (in terms of geographical coverage and the employee’s own personal activities) of the restrictions and be mindful of any local payment obligations when preparing restrictive covenants (e.g., in France and in Germany). Europe is also making an attempt to remedy the uneven levels of protection and remedies in relation to trade secrets. The draft EU Directive for trade secret protection is currently making its way through the legislative process with no firm timeline for adoption.
- In addition to local or regional nuances, employers should take advantage of other contractual and/or tactical mechanisms as a “belt-and braces” approach, such as claw-backs and forfeiture of deferred compensation (where permitted), use of garden leave provisions, and strategic use of forum selection and choice-of-law provisions. Employers operating in the U.S. should also consider strategic use of mandatory forum selection and choice-of-law provisions in restrictive covenant agreements with U.S.-based employees.
- Practical measures should also be taken to protect confidential information and trade secrets, including limiting access to sensitive information, using exit interviews, and (provided that applicable privacy laws are followed) monitoring use of company IT resources and conducting forensic investigations of departing employees’ computer devices.
France…Do Not Miss the Deadline
- Drafting a non-compete clause under French labor law requires specific care as courts are particularly critical of the following: duration, the geographical and activities scope, the conditions in which the employer releases the employee from such obligation, the employee’s role, the interests of the company, and the financial compensation provided by the clause.
- Recent case law shows that French courts are strict when it comes to the interpretation of the non-compete clauses and the possibility to waive the non-compete clause. If an employer misses the relevant contractual deadline to release an employee from her/his non-compete, the financial compensation will be due for the entire period. Similarly, if the employer waives the non-compete prematurely, the courts will consider the waiver as invalid.
- During employment, an employee is subject to a general obligation of confidentiality and breach may be subject to civil and criminal sanctions. Only “trade secrets,” however, are protected post-termination under certain circumstances. Employers should therefore automatically include a confidentiality clause in employment agreements to strengthen the protection of the company’s data post-termination. Good news for employers: the French High Court recently confirmed that, unlike non-compete covenants, a confidentiality clause does not require any financial compensation.
United Kingdom…Less is NOT More
- Restrictive covenants are potentially void as an unlawful restraint of trade. In practical terms, this means that such covenants are only likely to be enforceable where they are fairly short in duration, the restriction is narrowly focused on the employee’s own personal activities (e.g., by geographical scope), and is specific to the commercial environment. Unlike in some European jurisdictions, payment will not “rescue” an unenforceable restriction. In addition, the English courts tend to have an unforgiving nature when it comes to poor drafting even if the intention of the parties is obvious. Employers should therefore also consider other creative and acceptable ways to aid enforceability, such as deferring remuneration and varying and reaffirming covenants.
- Absent any agreement, only “trade secrets,” which are narrowly defined, will be protected after employment. Employers should therefore ensure that employment contracts and/or other free-standing binding agreements provide full coverage for the protection of confidential and other valuable business information post-termination. Often the physical protection of confidential information is underestimated (e.g., encrypting data, installing passwords, secure storage, etc.), which can be a more effective and less costly approach for employers in the long-term. Employers should therefore also seek to retain physical control of such information in order to reduce and limit unwanted disclosure and misuse.
China….Stay ON TOP of An Evolving Regulatory System
- In China, employers should ensure that they have a non-compete agreement with the employee at the time of employment, so that the employer can decide whether to enforce or not to enforce the non-compete agreement for a period of post-employment.
- In addition, employers should ensure that documents are marked with “confidential,” or that other measures are taken to protect confidential information. Otherwise, remedies may not be available under the Chinese law for breach of confidential obligations. Employers should also review and update rules and policies regarding confidentiality and security arrangements. Pre-employment vetting of R&D staff is also essential to prevent unexpected breach or non-compliance with trade secret and intellectual property rights.
- As a notable (and relatively recent) development, injunctive relief for trade secret misappropriation is available in Shanghai and Anhui.
The fourth installment, presented by John Tomaszewski, Eric Barton and Joshua Salinas, addressed the relationship between trade secrets, social media, and privacy.
Social Media Privacy Laws are on the Rise
- At least 20 states now have laws prohibiting employers from requiring or even asking for access to employees’ or job applicants’ personal social media accounts. Penalties for violations range from nominal administrative fines to much larger damages, including punitive damages and attorneys’ fees. Many of the laws, however, have broad exceptions and loopholes, including required employer access of “nonpersonal” accounts and on suspected data theft or workplace misconduct. To learn more, please see our Social Media Privacy Legislation Desktop Reference.
Safeguard Your Trade Secrets
- Protecting your company’s valuable confidential information and trade secrets from disloyal employees is a very different exercise than keeping strangers and competitors locked-out. This exercise is further complicated by inconsistent privacy legislation, which can vary wildly from state to state. For example, a disloyal employee secretly copies a confidential employer customer list onto his personal LinkedIn account. The employee works in a state that has adopted the new privacy legislation, which has an exemption for suspected data theft. The employer hears unsubstantiated gossip about that list copying, but does not investigate based on the flimsy evidence and for fear of violating the privacy law. The employee later resigns, and uses that list for a competitor. Did the former employer waive a trade secrets claim against the employee because it decided not to investigate, even though it could have? Did that decision amount to an unreasonably insufficient effort to protect its trade secrets?
Social Media and Bring Your Own Device (BYOD)
- Social media is an extension of the trend to combine work, and non-work related activities within the same platform. Just like smartphones allow you to engage in both work and non-work related emailing, the social media platforms continue to drive the conflation of personal and employee activity. As a result, a holistic approach needs to be taken in managing the employee. Otherwise, what was once considered a reasonable policy at work may get applied to private or protected activity and thereby become at a minimum, unreasonable; and in some cases, illegal.
The fifth installment, directed by Robert Milligan, James McNairy and Joshua Salinas, focused on recent legal developments in California trade secret and non-compete law and how it is similar to and diverse from other jurisdictions, including: a discussion of the California Uniform Trade Secrets Act; the interplay between trade secret law and Business and Professions Code Section 16600 (which codifies California’s general prohibition of employee non-compete agreements), and recent case developments regarding non-compete agreements and trade secret investigations. The panel discussed how these latest developments impact counseling, litigation and deals involving California companies.
- Broad “no re-hire” provisions in settlement agreements may, under certain circumstances, constitute unlawful restraints of trade under California law, as reflected in Golden v. California Emergency Physicians Medical Group (9th Cir. Apr. 8, 2015).
- Alone, voluntary dismissal of a trade secret claim is not a safe harbor to liability for attorneys’ fees if the claim otherwise meets the criteria for having been brought or maintained in bad faith.
- The preemptive scope of California’s Uniform Trade Secrets Act is very broad. As a result, tort or conversion claims that might be viable in other states may be preempted when pleaded in California with a trade secret claim, provided independent unlawful acts are not alleged.
In Seyfarth’s sixth installment, attorneys Michael Baniak and Paul Freehling discussed the significant statutory changes to several jurisdictions’ laws regarding trade secrets and restrictive covenants and pending legislation proposed in additional jurisdictions over the past year. As trade secrets and non-compete laws continue to evolve from state to state in piecemeal fashion, companies should continually revisit their trade secrets and non-compete strategies in light of the evolving legal landscape and legislative trends.
- Enforceability of non-compete, non-solicit, and confidentiality covenants in employment agreements depends primarily on the applicable statutes, and pertinent judicial decisions and conflict of laws principles, regarding (a) the acceptable breadth of such covenants, and (b) appropriate balancing of the legitimate business interests of employers, employees, and the public. Enforceability requires constant vigilance in updating the covenants because the law, business, and employment evolves often very rapidly.
- Because each jurisdiction’s version of the Uniform Trade Secrets Act as enacted (it has been adopted in one form or another in the District of Columbia and each of the 50 states except New York and Massachusetts) is unique, all relevant jurisdictions’ versions must be analyzed.
- Oddities in the law of restrictive covenants include: (a) hostility in a few states to non-competes and/or non-solicit covenants in general; (b) in some states (whether by statutory provision or judicial fiat); certain employees are exempt from such covenants; (c) there are disparities in various courts’ willingness to “blue pencil,” reform, or invalidate covenants deemed overbroad as written; and (d) there are variations in different courts’ views as to whether only actual disclosure, or also threatened or inevitable disclosure, of trade secret or confidential information will be enjoined.
In Seyfarth’s seventh installment, attorneys Justin Beyer, Eric Barton and Bob Stevens focused on the issues confronting plaintiffs in preparing for and prosecuting trade secret cases and the various ins and outs of seeking both temporary restraining orders and preliminary injunctions.
- Employers can best protect their trade secrets by instituting robust training, policies and procedures aimed at educating its work force as to what constitutes confidential information, and that this information belongs to the employer, not the employee. By utilizing confidentiality, invention assignment and reasonable restrictive covenants, as well as implementing onboarding and off-boarding protocols, educating employees on non-disclosure obligations, educating employees on that data which the employer considers confidential, clearly marking the most sensitive data, and restricting access to confidential information, both systemically and through hardware and software blocks, employers can both educate and prevent misappropriation.
- If an employee voluntarily resigns his or her employment with the company, the employer should already have in place a specific protocol to ensure that the employee does not misappropriate company trade secrets. Such steps include questioning the employee on where he intends to go, evaluating whether to shut off access to emails and company systems prior to the expiration of the notice period, requesting a return of company property, including if the company utilizes a BYOD policy, and reminding the employee of his or her continuing obligations to the company. Likewise, companies should have robust onboarding policies in place to help avoid suit, such as attorney review of restrictive covenants, offer letters that specifically disclaim any desire to receive confidential information from competitors, and monitoring of the employee after hire to ensure that they are not breaching any confidentiality or non-solicitation obligations to the former employer.
- If a company finds itself embroiled in litigation based on either theft of its trade secrets or allegations that it either stole or received stolen trade secrets, it is important to take swift action, including interviewing the players, preserving the evidence, and utilizing forensic resources to ascertain the actual theft or infection (if you are on the defense side). Companies defending against trade secret litigation also need to analyze and consider whether an agreed injunction is in its best interests, while it investigates the allegations. These types of cases tend to be fast and furious and the internal business must be made aware of the impact this could have on its customer base and internal resources.
In Seyfarth’s eighth installment, Seyfarth attorneys Robert Milligan, Daniel Hart and Joshua Salinas discussed their recently released Social Media Privacy Legislation Desktop Reference and addressed the relationship between trade secrets, social media, and privacy legislation. We compiled a list of brief summaries of the more significant cases that were discussed during the webinar:
- In KNF&T Staffing Inc. v. Muller, No. 13-3676 (Mass. Super. Oct. 24, 2013), a Massachusetts court held that updating a LinkedIn account to identify one’s new employer and listing generic skills does not constitute solicitation. The court did not address whether a LinkedIn post could ever violate a restrictive covenant.
- Outside of the employment context, the Indiana Court of Appeals in Enhanced Network Solutions Group Inc. v. Hypersonic Technologies Corp., No. 951 N.E.2d 265 (Ind. Ct. App. 2011) held that a non-solicitation agreement between a company and its vendor was not violated when the vendor posted a job on LinkedIn and an employee of the company applied and was hired for the position, because the employee initiated all major steps that led to the employment.
- In the context of Facebook, a Massachusetts court ruled in Invidia LLC v. DiFonzo, No. 2012 WL 5576406 (Mass. Super. Oct. 22, 2012) that a hairstylist did not violate her non-solicitation provision by “friending” her former employer’s customers on Facebook because “one can be Facebook friends with others without soliciting those friends to change hair salons, and [plaintiff] has presented no evidence of any communications, through Facebook or otherwise, in which [defendant] has suggested to these Facebook friends that they should take their business to her chair.”
- Similarly, in Pre-Paid Legal Services, Inc. v. Cahill, No. CIV-12-346-JHP, 2013 U.S. Dist. LEXIS 19323 (E.D. Okla., Jan. 22, 2013), a former employee posted information about his new employer on his Facebook page “touting both the benefits of [its] products and his professional satisfaction with [it]” and sent general requests to his former co-employees to join Twitter. A federal court in Oklahoma denied his former employer’s request for a preliminary injunction, holding that communications were neither solicitations nor impermissible conduct under the terms of his restrictive covenants
- The Virginia Supreme Court in Allied Concrete Co. v. Lester, 285 Va. 295 (2013) upheld a decision sanctioning a plaintiff and his attorney a combined $722,000 for deleting a Facebook account and associated photographs that undermined the plaintiff’s claim for damages stemming from the wrongful death of his wife in a car accident. The deleted photographs showed plaintiff holding a beer while wearing a T-shirt with the message “I Love Hot Moms.” Subsequent testimony revealed that the plaintiff’s attorney had instructed his paralegal to tell the plaintiff to “clean up” his Facebook entries because “[they did] not want blowups of [that] stuff at trial.”
- PhoneDog v. Noah Kravitz, No. C11-03474 MEJ, 2011 U.S. Dist. LEXIS 129229 (N.D. Cal. 2012) involved a dispute over whether a Twitter account’s followers constitute trade secrets even when they are publically visible. The court denied the defendant’s motion to dismiss and ruled that PhoneDog, an interactive mobile news and reviews web resource, could proceed with its lawsuit against Noah Kravitz, a former employee, who PhoneDog claimed unlawfully continued using the company’s Twitter account after he quit. The court held that PhoneDog had described the subject matter of the trade secret with “sufficient particularity” and satisfied its pleading burden as to Kravitz’s alleged misappropriation by alleging that it had demanded that Kravitz relinquish use of the password and Twitter account, but that he refused to do so. With respect to Kravitz’s challenge to PhoneDog’s assertion that the password and the Account followers do, in fact, constitute trade secrets—and whether Kravitz’s conduct constitutes misappropriation, the court ruled that such determinations require the consideration of evidence outside the scope of the pleading and should, therefore, be raised at summary judgment, rather than on a motion to dismiss. The parties ultimately resolved the dispute.
- The Second Circuit Court of Appeals in Triple Play v. National Labor Relations Board, No. 14-3284 (2d. Cir. Oct. 21, 2015) affirmed an NLRB decision that a Facebook discussion regarding an employer’s tax withholding calculations and an employee’s “Like” of the discussion constituted concerted activities protected by Section 7 of the National Labor Relations Act. The Facebook activity at issue involved a former employee posting to Facebook, “[m]aybe someone should do the owners of Triple Play a favor and buy it from them. They can’t even do the tax paperwork correctly!!! Now I OWE money . . . Wtf!!!!” A current employee “Liked” the post and another current employee posted, “I owe too. Such an asshole.” The employer terminated the two employees for their Facebook activity. The Second Circuit affirmed the NLRB’s decision that the employer’s termination of the two employees mentioned Facebook activity was unlawful.
In Seyfarth’s ninth and final installment, attorneys John Skelton, Erik Weibust and Anne Dunne focused on how to implement and enforce covenants against competition in the franchise context. A franchisor’s trade secrets, confidential information, and goodwill are often among its core assets, and implementing and enforcing covenants against competition are a common, and effective, means of protecting such business interests.
- For franchisors, non-compete provisions, especially post-termination restrictive covenants, are an important part of the franchise relationship because franchisees are given access to a franchisor’s confidential information and trade secrets. Upon the termination, expiration or non-renewal of the franchise agreements, franchisors have a vested interest in preventing the use of such information in a competitive business and in protecting the integrity of the franchise network and their goodwill.
- The enforceability of non-compete provisions is most often litigated in the context of a request for a preliminary injunction, and thus franchisors need to be able present evidence to establish: (1) all of the necessary elements, especially that the franchisor will suffer irreparable harm to its legitimate business interests and goodwill if the franchisee violates the terms of the agreed upon non-compete; and (2) that the restrictions are reasonable in time and scope.
- The enforceability of non-compete provisions varies significantly by state, so national franchisors must ensure that restrictive covenants are drafted to comply with the various definitions of legitimate business interests and protected goodwill, and the different blue pencil, red pencil and reformation rules.