United States: Top 10 Developments And Headlines In Trade Secret, Non-Compete, And Computer Fraud Law In 2018/2019

Continuing our annual tradition, we have compiled our top developments and headlines for 2018-2019 in trade secret, non-compete, and computer fraud law.

1. Government Agencies Increasing Scrutiny of Restrictive Covenants

In mid-2018, the Attorneys General of ten states investigated several franchisors for their alleged use of "no poach" provisions in their franchise agreements. In a July 9, 2018 letter, the Attorneys General for New Jersey, Massachusetts, California, Washington, D.C., Illinois, Maryland, Minnesota, New York, Oregon, Pennsylvania, and Rhode Island requested information from several franchisors about their alleged use of such provisions. Less than twenty-four hours later, some franchisors (mostly different ones than those who received the information demands) entered into agreements with the Washington State Attorney General's Office to remove such clauses from their franchise agreements. The recent focus by state law enforcement on franchisors is a new twist, given that restrictive covenant agreements in the franchise industry are typically given more leeway than in the employment context.

In a settlement with the office of New York Attorney General, a large employer agreed to drop its non-compete requirement for all employees except high-level executives, consistent with a policy in favor of employee mobility.

On the federal level, Assistant Attorney General Makan Delrahim announced in 2018 that the DOJ had been "very active" in reviewing potential antitrust violations stemming from agreements among employers not to compete for workers. Employers should remain vigilant and confirm their compliance with these laws, as employers may face DOJ enforcement actions and class action litigation.

2. Supreme Court Grants Cert. to Interpret Meaning of "Confidential" or "Trade Secret" Under FOIA

On January 11, 2019, the Supreme Court accepted certiorari in Food Marketing Institute v. Argus Leader Media to reconcile fractured circuit tests on when the government may withhold information from a Freedom of Information Act ("FOIA") request based on responsive information being confidential or a trade secret. The case has major potential ramifications for the protections given to sensitive information submitted by companies to the government, whether voluntarily, under compulsion (say, via grand jury or administrative subpoena) or as part of reporting obligations. For anyone or entity that does business or interfaces with the government, the Supreme Court's decision in Food Marketing Institute will be one to closely watch.

3. Whistleblower Protection

In what appeared to be a first under the DTSA, the Eastern District of Pennsylvania federal court in Christian v. Lannett Co., Inc. threw out claims against an alleged trade secret thief on the basis of the DTSA's immunity for confidential disclosures to attorneys in the course of investigating a suspected violation of the law.

In MMM Holdings, Inc. v. Reich, a California Court of Appeal held that the receipt, retention, and dissemination of confidential information by a whistleblower's attorney is protected under the state's anti-SLAPP statute, adding to the protections for attorneys who in similar factual circumstances, use or disclose confidential documents in related actions.

In Anheuser-Busch Companies, LLC, et al v. James Clark, a Ninth Circuit panel heard oral arguments in late 2018 concerning the denial of a former employer's anti-SLAPP motion in a trade secret misappropriation and breach of contract case. This is the second time the case has made its way up to the Ninth Circuit. The panel has not yet issued its decision but the Ninth Circuit's decision could have far reaching implications for trade secret and data theft cases involving purported whistleblowing activities.

4. Notable Trade Secrets Cases

On the civil side, a Texas jury awarded over $700 million in damages to a technology start-up regarding the alleged misappropriation of its real estate valuation trade secrets.

On the criminal side, a Chinese scientist was sentenced to over 10 years in prison for conspiring to steal proprietary rice seeds for representatives of a Chinese crop institute.

In a matter of first impression under the DTSA, the Fifth Circuit held that a dismissal without prejudice of a DTSA case does not support an award of prevailing party attorney's fees.

The Fifth Circuit's decision in Brand Services v. Irex, combined with prior Louisiana appellate court rulings, largely settles the scope of the LUTSA's preemption for future disputes. The LUTSA only preempts claims based on actual trade secrets, not claims based on confidential information outside the definition of a trade secret.

The Texarkana Court of Appeals took the extraordinary measure of affirming an award of plaintiff attorney's fees against a defendant for willful and malicious misappropriation of trade secrets in an amount that was ultimately more than 50 times higher than the plaintiff's actual awarded damages.

For further information about the DTSA, please see our desktop reference: " The Defend Trade Secrets Act: What Employers Should Know Now."

5. Expansions of California's Business & Professions Code ァ 16600

A California Court invalidated a non-solicitation of employees provision as an unlawful restraint of trade in violation of section 16600 (i.e., California's non-compete statute), where the employees at issue were travel nurse recruiters who left their employer for a competitor. In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. et al., No. D071924, 2018 WL 5669154 (Cal. App. 2018), the court rejected a "reasonableness" approach to employee non-solicitation provisions, emphasizing the plain language of section 16600 and the California Supreme Court's decision in Edwards v. Anderson用lacing further into question the viability of employee non-solicitation provisions.

California's notorious section 16600 may even reach non-parties to a contract, according to a California Superior Court. The court applied section 16600 to invalidate the "show cause order" provisions in the NCAA bylaws, endangering the NCAA's ability to enforce its rules by voiding one of its "go-to" sanctions. The court reasoned that the "show cause" penalty requiring NCAA member schools to demonstrate to the Committee why they should not be penalized for the rule violations of a sanctioned individual is essentially a "career-terminating sanction" that restricts the individual's ability to practice his profession nationwide.

Back in 2015, we covered the divided holding of the Ninth Circuit in Golden v. California Emergency Physicians Medical Group, that a "no re-hire" provision in a settlement agreement could constitute a restraint of trade in violation of California law. After a second round at the Ninth Circuit, the case has been reversed and remanded yet again, based on the panel majority's conclusion that the "no re-hire" provisions at issue were overbroad and unenforceable.

These decisions demonstrate the extent to which some California courts will go to invalidate restraints on employees and promote "open competition and employee mobility."

In contrast, a Delaware Chancery Court found that a non-compete provision may be enforced against a California executive because the employee was represented by counsel concerning the Delaware choice of law and forum selection provisions contained in the agreement.

6. Other Notable State Cases Regarding Restrictive Covenants

The Wisconsin Supreme Court in Manitowoc Company v. Lanning, 2018 WI 6 (2018), extended the reach of the state's highly restrictive non-compete statute to invalidate an employee non-solicitation clause, finding that the non-solicitation clause prevented the employee from soliciting any of the company's 13,000 employees worldwide, and therefore was essentially a non-compete subject to the state's strict statutory requirements.

In Farm Bureau Life Insurance Co. v. Dolly, 2018 S.D. 28 (2018), the South Dakota Supreme Court invalidated a life insurance agent's non-compete agreement because it did not meet the requirements set forth in South Dakota's state statute regarding non-competes.

In Capistrant v. Lifetouch, 916 N.W.2d 23 (2018), the Minnesota Supreme Court determined that the return of property provision at issue in the case was a condition precedent of the employee's receipt of post-employment payments, but remanded to the district court based on its adoption of "inequitable forfeiture."

The Northern District of Illinois applied the "janitor rule" in Medix Staffing Solutions Inc. v. Dumrauf, No. 1:2017cvo6648 (N.D. Ill. 2018), to invalidate a former sales director's non-compete agreement as overbroad and unenforceable.

Establishing a new cautionary tale of joint representation of employer and employee, a federal judge in Kentucky allowed claims for tortious interference with contract and aiding and abetting breach of fiduciary duty to proceed against the defendant law firm, based on allegations that the defendants told the plaintiff's former employees that they could make more money on their own and directed the employees to breach their contracts.

7. New State Legislation Regarding Restrictive Covenants

On July 31, 2018, the Massachusetts legislature finally passed a non-compete bill, which went into effect on October 1, 2018 and changed the landscape of non-compete enforcement in the state. The Massachusetts Noncompetition Agreement Act ("MNAA") imposes new restrictions on non-competes entered into on or after the effective date of the Act, governing everything from the length of permissible non-compete provisions to the enforceability of non-compete agreements. With this bill, Massachusetts also became the 49th state in the Union (with only New York lagging) to adopt a version of the Uniform Trade Secret Act. A more detailed discussion of the MNAA, and what it means for Massachusetts and other states that face increased difficulty in enforcing non-compete agreements, can be found here.

In March 2018, Idaho amended its non-compete law to put the burden of establishing irreparable harm back on employers容ffectively nixing a previous amendment in 2016 entitling companies to a rebuttable presumption of irreparable harm upon a finding that the defendant-employee violated the non-compete.

In March 2018, Utah passed a new law modifying its Post-Employment Restricts Act to bar the enforcement of non-compete agreements for employees in the broadcasting industry who earn less than a set salary amount per year and where certain conditions are present.

In April 2018, Colorado passed an amendment to a law governing non-compete agreements for physicians, excluding physicians treating patients with "rare disorders" from the requirement to pay damages for joining a competitor.

Other states, including New Jersey and Washington, have proposed legislation curbing employers' ability to enforce non-compete agreements and other restrictive covenants. Although the proposed restrictions did not pass, such proposals reveal the continuing trend of limiting the availability and enforceability of restrictive covenants. Vermont recently proposed legislation as well to curb the use of non-compete agreements.

For a 50 state survey of non-compete laws, please see our recently updated: "50 State Desktop Reference: What Businesses Need To Know About Non-Compete and Trade Secrets Laws."

8. Federal Legislation Regarding Restrictive Covenants

On April 26, 2018, Democratic U.S. Senators Warren, Murphy, and Wyden introduced the "Workforce Mobility Act," which would prohibit the use of covenants not to compete, nationwide. The text of the bill provides, in pertinent part, that "No employer shall enter into, enforce, or threaten to enforce a covenant not to compete with any employee . . . who in any workweek is engaged in commerce or in the production of goods for commerce (or is employed in an enterprise engaged in commerce or in the production of goods for commerce)." However, the bill also states that "Nothing in this Act shall preclude an employer from entering into an agreement with an employee to not share any information (including after the employee is no longer employed by the employer) regarding the employer or the employment that is a trade secret, as defined in section 1839 of title 18, United States Code."

Florida Senator Marco Rubio recently introduced the "Freedom to Compete Act" (the "Act") proposing to amend the Fair Labor Standards Act (FLSA) of 1938 to ban non-competes for most non-exempt workers. The Act is broadly drafted to void any agreement that restricts "any work for another employer," "any work in a specified geographical area," and "any work for another employer that is similar" to the employee's prior work. While it purports to void only non-compete agreements, the bill's use of the sweeping language "any work" could be interpreted to ban not only non-compete agreements, but other post-employment restrictive covenants such as customer and employee non-solicitation agreements. Further, the Act (if passed) would purportedly apply retroactively to agreements entered into before its enactment.

9. New Trade Secrets Law for France

Continuing as one of the EU's first few members to protect trade secrets on a local front, France recently adopted loi nー2018-670, which offers companies protection for their economic and strategic information, implements the Directive 2016/943/EU, and puts French companies on a more equal footing with foreign competitors who already benefit from regulated business secrecy (e.g., U.S. and Chinese companies).

10. Blockchain Technology Intersecting with Trade Secrets

The rise in blockchain technology has created new challenges for trade secret disputes as courts struggle to apply existing trade secret law to new types of digital property and information. Founder Starcoin v. Launch Labs, Inc. was one of the first trade secret decisions involving blockchain technology. There, the Southern District of California federal court denied the plaintiff's request for a preliminary injunction regarding the idea for cryptocollectible cats bearing the likeness of sports athletes and other celebrities. But the case's conceptual confusion around blockchain technologies葉he attempt to draw a clear distinction between commodity/coin tokens and unique collectibles, where no such distinction really exists擁s indicative of the danger cutting-edge companies may run into in trying to enforce (or even defend against) trade secret claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq痴 use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor痴 own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq痴 Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq痴 Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq痴 right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions