New Legislation in Washington and Oregon Limits the Enforceability of Noncompete Agreements

New legislation enacted in May 2019 will make noncompetes harder to enforce in Washington state and Oregon.

Washington State Enacts Sweeping Noncompete Legislation

On May 8, 2019, Washington became the latest state to enact comprehensive noncompete legislation. Under the Act Relating to Restraints, Including Noncompetition Covenants, on Persons Engaging in Lawful Professions, Trades or Businesses, noncompetition covenants will be void and unenforceable unless they meet a number of specific requirements. Although the act does not take effect until January 1, 2020, it impacts certain agreements signed and certain claims that arise before the effective date, as explained further below.

The act provides that noncompetition covenants are only enforceable against employees and independent contractors whose annual earnings exceed $100,000 and $250,000, respectively. These amounts will be adjusted annually, on September 30 of each year, to account for inflation…

Oregon Legislation Imposes Additional Notice Requirements on Employers

Modifications to Oregon’s existing Noncompetition Law, ORS 653.295, were signed into law on May 14, 2019, introducing additional restrictions on employers’ already curtailed ability to enforce noncompetition covenants, except with respect to certain “excluded employees” described in ORS 653.010(3). Under the newly amended legislation, employers will not only be required to meet preemployment notice requirements under the Noncompetition Law, they must now give employees postemployment notice of their noncompete obligations…

View the full Alert on the Duane Morris LLP website.

Third Circuit Reverses N.J. Court Decisions on Restrictive Covenant Agreement’s Enforceability

On April 26, 2019, the Third Circuit Court of Appeals vacated and remanded two district court decisions in which the courts had held that a restrictive covenant agreement—offered only to the company’s highest-performing sales employees in exchange for eligibility to participate in a stock-option award program—was unenforceable per se under New Jersey law. ADP, LLC v. Rafferty, 18-1796, 2019 WL 1868701 (3d Cir. Apr. 26, 2019).

ADP utilized two separate layers of agreements containing postemployment restrictive covenants: (1) sales representation agreements (SRAs) and nondisclosure agreements (NDAs) signed by all employees at the time of hire and as a condition of employment; and (2) restrictive covenant agreements (RCAs) with certain high-performing employees as a condition of those employees’ eligibility to participate in the company’s stock-option award program. The RCAs contained more restrictive provisions than the SRAs and NDAs.

View the full Alert on the Duane Morris LLP website.

Pa. Superior Court Holds “No-Hire” Provision in Commercial Contract Between Two Businesses Unenforceable

On January 11, 2019, the Pennsylvania Superior Court, sitting en banc, affirmed a trial court decision that a “no-hire” provision in a commercial contract between two companies—i.e., an agreement by which one company agrees not to solicit or hire the employees of the other for a certain period of time—violated public policy, and was thus unenforceable under Pennsylvania law. Pittsburgh Logistics Systems, Inc. v. Beemac Trucking, LLC and Beemac Logistics, LLC, No. 134 WDA 2017, 2019 Pa. Super. 13 (Jan. 11, 2019).

In Pittsburgh Logistics, Pittsburgh Logistics Systems (PLS), a third-party logistics provider, entered into an agreement with one of its customers, BeeMac Trucking and BeeMac Logistics, for PLS to provide logistics services to BeeMac. The agreement included a no-hire provision prohibiting BeeMac from directly or indirectly hiring, soliciting for employment, inducing or attempting to induce any employee of PLS or any of its affiliates to leave their employment with PLS or the affiliate during the term of the agreement and for a period of two years thereafter. After four PLS employees joined BeeMac, PLS sued BeeMac and its former employees seeking an injunction to enforce, among other things, the no-hire provision. The trial court, noting that a provision such as the one between PLS and BeeMac has never been the subject of litigation in Pennsylvania in any reported case, refused to enforce the no-hire provision, citing cases in other jurisdictions where similar provisions were held to be unenforceable. PLS appealed the trial court’s denial of its preliminary injunction motion seeking to enforce the no-hire provision.

Read the full Duane Morris Alert.

Fifth Circuit Decision Adds to Growing Body of Case Law on the Scope of Uniform Trade Secrets Act Preemption

Your New Orleans restaurant has never been more successful.  Business is booming.  People cannot get enough of your famous crawfish étouffée.  With your success, you’re planning to expand into the lucrative retail hot sauce market.  You have all the supply, manufacture, and distribution contracts lined up.  Suddenly, Judas, your trusted sous chef for ten years, quits your business, takes your secret hot sauce recipe and your business plans, and starts his own hot sauce brand.  How are you protected?

The Fifth Circuit’s recent decision in Brand Servs., L.L.C. v. Irex Corp., 909 F.3d 151 (5th Cir. 2018) addresses this issue and adds to a growing list of cases addressing whether state enactments of the Uniform Trade Secrets Act (“UTSA”) preempt common law claims for conversion of confidential business information. Continue reading Fifth Circuit Decision Adds to Growing Body of Case Law on the Scope of Uniform Trade Secrets Act Preemption

Massachusetts Is Set to Adopt the Uniform Trade Secrets Act . . . What Now?

On August 1, 2018, the Massachusetts legislature passed a bill adopting the Uniform Trade Secrets Act in Massachusetts. The bill is headed to the Governor’s desk for approval within ten days. Massachusetts adopting the UTSA will leave New York the sole jurisdiction in the United States that relies only on common law protections for trade secrets.

In large part, the UTSA is consistent with and codifies existing Massachusetts law. In some important respects, however, the new UTSA protections are different from what previously existed. As a result, some immediate questions arise with respect to trade secret litigation under the new UTSA. Until Massachusetts courts decide these issues, the answers will not be certain.

What is a Trade Secret?

Massachusetts previously followed the six-factor test in the Restatement of Torts to determine if information is a trade secret. By contrast, the UTSA defines a trade secret as “information . . . that (i) . . . provided economic advantage, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, others who might obtain economic advantage from its acquisition, disclosure or use and (ii) . . . was the subject of efforts that were reasonable under the circumstances, which may include reasonable notice, to protect against it being acquired, disclosed or used without the consent of the person properly asserting rights therein or such person’s predecessor in interest.”

While the new UTSA definition is similar to the former rule, one new development under the UTSA is that trade secrets are protectable if they have “actual or potential” economic value. Under the former definition, the trade secret had to have actual value, and had to be “used in one’s business.” The new UTSA definition will cover secret information with “potential” economic value, even if it had not being actively used by the victim of the misappropriation.

Are c. 93A Damages Still Available for Trade Secret Misappropriation?

Before enactment of the UTSA, trade secret misappropriation claims in Massachusetts would include a Chapter 93A claim as a matter of course because trade secret misappropriation can be an unfair trade practice under Chapter 93A. See Peggy Lawton Kitchens, Inc. v. Hogan, 18 Mass. App. Ct. 937, 939 (1984).

The UTSA, however, expressly “supersede[s] any conflicting laws of the commonwealth providing civil remedies for the misappropriation of a trade secret.” An open issue is whether Massachusetts courts will find that treble damages under Chapter 93A are “conflicting” with the UTSA’s damages provision that limits exemplary damages to double actual damages in the event of “willful and malicious” misappropriation.

Are Other Business Torts Superseded by the UTSA?

Massachusetts common law includes a tort for misappropriation of confidential business information, even if that information does not meet the technical definition of a trade secret. USM Corp. v. Marson Fastener Corp., 379 Mass. 90, 104 (1979).

It is not clear if the new UTSA will supersede this tort in Massachusetts going forward. Other jurisdictions are split on this issue. Some hold that UTSA preempts all causes of action related to the misappropriation of trade secrets, but others allow such claims to proceed because they are expressly based on claims other than trade secret misappropriation. See Orca Communications Unlimited, LLC v. Noder, 337 P.3d 545 (Az. 2014).

When Will Attorney’s Fees Be Recoverable?

The UTSA includes a new attorney’s fee shifting provision. As mentioned above, most trade secret plaintiffs in Massachusetts already included claims under Chapter 93A, with an accompanying attorney’s fees claim. Under the UTSA, attorney’s fees are recoverable for the plaintiff in cases of “willful and malicious misappropriation.” This may be a more restrictive standard than existed under Chapter 93A for the recovery of attorney’s fees.

The UTSA expressly allows the defendant in a trade secret misappropriation claim to recover fees if the court finds “a claim of misappropriation is made . . . in bad faith.” This fee-shifting provision liberalizes existing Massachusetts law, which would only allow a trade secret defendant to recover attorney’s fees in limited circumstances. This provision may act as a deterrent to trade secret misappropriation claims brought in “bad faith.”

Will Massachusetts Adopt the “Inevitable Disclosure” Doctrine?

The majority of existing UTSA jurisdictions have adopted “some form of the inevitable disclosure doctrine.” Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 291 (Ct. App. 2002). The “inevitable disclosure” doctrine arises out of UTSA language that empowers courts to enjoin “[a]ctual or threatened misappropriation” of trade secrets (emphasis added). In the seminal case of PepsiCo, Inc. v. Redomnd, 54 F.3d 1262 (7th Cir. 1995), a high-ranking Pepsi executive quit to work for Pepsi’s “fierce” then-competitor Quaker. Pepsi obtained an injunction against the employee’s continued employment with Quaker because the district court found that the employee’s disclosure of confidential marketing and development strategies was inevitable. The Seventh Circuit affirmed, expressly overruling common law, on the basis of the “threatened misappropriation” language of the Illinois UTSA. The “inevitable disclosure” doctrine has been applied by some courts to impose a de-facto non-competition agreement on employees who have not signed such an agreement in instances where their work for an employer would result in the “inevitable disclosure” of a prior employer’s trade secrets.

Massachusetts courts have previously resisted the application of the “inevitable disclosure” doctrine. One reason is a concern that it could jeopardize employees’ rights to future employment. With the new language of the UTSA, the question may be ripe to be re-visited by Massachusetts courts.

2018 Non-Compete and Trade Secrets Law Preview

With 2018 well underway, it’s time to look ahead to what are likely to be some of the key issues/stories relating to non-competition agreements and trade secrets this year:

  1. Continued Push in State Legislatures for Non-Compete Reform

Last year saw the enactment of a number of state laws relating to non-competition agreements. See, e.g., Cal. Lab. Code § 925 (setting conditions on requiring employees who primarily reside and work in California to sign agreements containing a mandatory non-California choice of law clause or a mandatory forum selection clause outside of California); 820 Ill. Comp. Stat. 90/1 through 90/10 (prohibiting covenants not to compete between Illinois employers and their low-wage employees, i.e., those who earn no more than “the greater of (1) the hourly rate equal to the minimum wage required by the applicable federal, State, or local minimum wage law or (2) $13.00 per hour.”); Nev. Rev. Stat. Ann. § AB 276, § 1 (setting forth new standard for Nevada courts to analyze non-competition agreements and reversing Nevada Supreme Court’s 2016 Golden Road decision to restore Nevada to a “blue pencil” state).

This year is likely to see a continued push in state legislatures for the enactment of laws relating to non-competition agreements. Legislators in New Jersey, Pennsylvania, New Hampshire and Vermont have all recently introduced bills that would limit enforcement of non-competition agreements. Pennsylvania’s bill (House Bill No. 1938), if enacted, would ban covenants not to compete entered into after the effective date of the legislation, except those involving the sale of a business or the dissolution or disassociation of a partnership or a limited liability company. If enacted, the bill would also entitle an employee who prevails in a suit against an employer related to the enforcement of a covenant not to compete to recover attorneys’ fees and punitive damages, and would require any dispute arising out of or related to a covenant not to compete involving a Pennsylvania resident to be exclusively decided by a Pennsylvania state court applying Pennsylvania law. Continue reading 2018 Non-Compete and Trade Secrets Law Preview

Q&A: Duane Morris Attorneys Weigh In On Recent Trade Secret Law Trends

Duane Morris partners Lawrence Pockers, Shannon Hampton Sutherland and Daniel Walworth shared their views on the latest trends in trade secret law.

Thomson Reuters: What trends are you seeing in trade secret litigation?

Shannon Hampton Sutherland: Last year, President Barack Obama signed into law the Defend Trade Secrets Act, which gives plaintiffs the ability to file trade secret cases in federal court without diversity jurisdiction. That is fairly significant because in the past, plaintiffs would have to file in state court, and now there is a federal cause of action that allows plaintiffs to go directly to federal court, which generally is a benefit. The second thing is that anecdotally, we are seeing more criminal cases come out of trade secrets theft than we’ve seen in the past. Prosecutors are taking up cases at a rate higher than normal, especially when foreign nationals are involved.

To read the full text of this article, please visit the Duane Morris LLP website.

Massachusetts Court Rules California Law Supersedes Massachusetts Choice-of-Law Provision and Non-Compete Clause in Employment Contract

By Gregory S. Bombard

On June 9, 2017, the Business Litigation Session (BLS) of the Massachusetts Superior Court issued a decision about the extraterritorial application of California’s public policy against non-competition agreements (Full text of the decision: Oxford Global Resources, LLC v. Jeremy Hernandez).  The plaintiff, Oxford, is a recruiting and staffing company headquartered in Massachusetts.  It hired the defendant to work as an entry-level “account manager” in an office in California.  As a condition of his employment, the employee signed a “protective covenants agreement” that included non-solicitation, non-competition, and confidentiality provisions.  This agreement contained a Massachusetts choice-of-law provision and a Massachusetts choice-of-venue provision.  Continue reading Massachusetts Court Rules California Law Supersedes Massachusetts Choice-of-Law Provision and Non-Compete Clause in Employment Contract

Recent Appellate Decision Draws Attention to Key Steps to Enforcing Restrictive Covenants

The Pennsylvania Superior Court’s recent decision in Metalico Pittsburgh, Inc. v. Douglas Newman, et al., No. 354 WDA 2016, 2017 PA Super. 109 (Apr. 19, 2017), confirms the importance of careful contractual drafting in agreements containing non-compete clauses and other post-employment restrictive covenants. In circumstances where an employee is hired for a term of employment but later becomes an at-will employee, that contractual language may determine the enforceability of the agreement’s non-compete and non-solicitation provisions.

To read the full text of this post by Duane Morris partner Luke McLoughlin, please visit the Duane Morris Appellate Review Blog.

White House Recommends Non-Compete Reforms

By Shannon Hampton Sutherland and Gregory S. Bombard

Last week, the White House called on states to enact sweeping reforms to their non-compete laws. The White House’s new policy position is that “most workers should not be covered by a non-compete agreement” and that, although “each state faces different circumstances,” many employers have sufficient other targeted remedies to protect their legal interests.

In its policy statement, the White House called on states to enact “non-compete” reforms, including one or more of the following: Continue reading White House Recommends Non-Compete Reforms