2016 Trade Secret/Restrictive Covenant Year-In-Review

2016, DTSA, Illinois, White House, Guidance to HR

Having flipped the calendar over to a new year, here’s a look back at some of the developments in trade secrets and restrictive covenants that shaped the law in 2016. Some major developments came not from the courts, but from the legislative and executive branches—both federal and state.

The Defend Trade Secrets Act of 2016: After years of inaction, Congress finally passed, and President Obama signed into law, a federal trade secrets act that creates a federal cause of action for trade secrets violations involving interstate or international commerce. While a full summary of the Act is beyond the scope of this post, significant provisions include:

  • A requirement that employers incorporate certain limited whistleblower protection disclosure provisions into their confidentiality or non-disclosure agreements in order to be able to seek attorneys’ fees and punitive damages;
  • An express provision that an injunction cannot be obtained based merely on the possibility the former employee would use his/her knowledge without evidence of threatened misappropriation of trade secrets (this provision essentially prevents federal courts from preventing an employee from accepting employment with a competitor based on the theory that the employee would “inevitably disclose” to the new employer the knowledge obtained from his or her past employment);
  • A procedure for the ex parte seizure of allegedly stolen trade secrets where the plaintiff can persuade the court that there is an imminent danger of the trade secrets being disseminated and that the misappropriating party would evade, avoid, or otherwise not comply with a court order if given notice (claims filed in bad faith, however, may subject the plaintiff to an award of damages, including punitive damages, and attorneys’ fees).

The Illinois Freedom to Work Act: In response to headlines (and litigation) involving employers such as Jimmy John’s subjecting low-wage employees to non-competition agreements, Illinois enacted the Illinois Freedom to Work Act. Effective on January 1, 2017, the law prevents employers from requiring certain low wage-earning employees sign non-competition agreements as a condition of employment. At present, the law would apply to employees making less than $13/hour (unless the federal, state, or local minimum wage is higher in which case the higher minimum wage would apply).

The law applies only to agreements entered into after its effective date. Nothing in the law would prevent an employer from requiring low-wage employees from signing non-solicitation provisions with respect to customers or employees or from enforcing confidentiality or non-disclosure agreements.

Attorneys General Get into the Act: Both the Attorneys General of Illinois and of New York raised concerns regarding sandwich-maker Jimmy John’s use of non-competition provisions in agreements it required its workers to sign. In New York, Jimmy John’s settled an investigation launched by the Attorney General by agreeing to stop including sample non-compete agreements in hiring packets sent to its franchisees and informing its franchisees that the New York Attorney General had concluded the non-compete agreements are unlawful and should be voided.

The New York Attorney General reached a similar settlement with Law360 regarding that company’s non-compete with its reporters and certain editorial employees.

 In Illinois, Jimmy John’s settled a lawsuit brought by the Illinois Attorney General. In the December settlement, Jimmy John’s agreed to stop using non-compete agreements to bar its workers from accepting jobs with competitors and to pay $100,000 to the State for programs that raise public awareness regarding non-competition provisions.

The White House Weighs in: The White House in May issued a report regarding the consequences that non-competition agreements have on the economy and concluded that such provisions, which the report estimated apply to nearly 1-in-5 workers, were frequently misused or overused. In October, the White House issued a follow-up “State Call to Action on Non-Compete Agreements” urging state policymakers to pursue best-practice policies, including:

  • banning non-competes for certain categories of workers such as: low-wage earners, workers in occupations promoting public health, or workers who might suffer adverse impacts from such restrictions including workers who were laid off or terminated without cause;
  • improving the transparency and fairness of non-competes by such steps as: requiring them to be provided before a job offer or promotion has been accepted or requiring consideration other than continued employment;
  • requiring employers to draft reasonable non-competes by rendering contracts void if they contain unenforceable provisions.

Regardless of whether the new administration continues to push these recommendations, it is likely that 2017 will continue to see state legislatures and attorneys general grapple with the use of non-competition agreements.

Antitrust Guidance to HR Professionals: In October, the U.S. Department of Labor and the Federal Trade Commission issued joint Guidance to HR Professionals with respect to possible antitrust violations arising out of “no-poaching” agreements. The Guidance advised that agreements (written or oral) that cause companies to refrain from hiring or soliciting employees of other companies could result in criminal prosecution, civil enforcement action, or private litigation seeking treble damages. The Guidance cautioned that criminal investigations of such agreements where there was no legitimate collaboration between the companies involved was possible. It is unclear to what extent the new administration will continue to make these investigations a priority.

 

Michael Braun concentrates his practice in labor & employment, civil litigation, and financial services. He litigates in both courts and arbitral forums, and counsels in the areas of employment, restrictive covenants, trade secrets, and business disputes. 

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