Noncompete agreements are an effective tool to protect intellectual property in the life sciences industry, but even a well-drafted noncompete agreement may run into challenges when an employer tries to enforce it. Under Massachusetts common law — and the law of many other states — a noncompete agreement is generally enforceable if its restrictions are reasonable and designed to protect legitimate business interests like trade secrets or goodwill. A recent decision from the Massachusetts Business Litigation Session demonstrates how those limitations can play out when a life sciences company seeks to enforce a noncompete agreement. Continue reading “Life Sciences Companies Can Face Challenges Enforcing Noncompete Agreements”
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”
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.
- 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”
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”
By Shannon Hampton Sutherland and Julian A. Jackson-Fannin
On September 27, 2016, in Adams Arms, LLC v. Unified Weapon Systems, Inc., et al., the U.S. District Court for the Middle District of Florida issued one of the first substantive opinions concerning claims brought under the new Defend Trade Secrets Act (“DTSA”).
The DTSA, which became effective on May, 11, 2016, expanded the jurisdiction of federal courts by, among other things, creating a new federal civil cause of action for trade secret misappropriation when “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Although the DTSA has been hailed as the new “national standard for trade secret misappropriation,” with certain exceptions, its provisions are largely consistent with the well-known Uniform Trade Secrets Act (“UTSA”) currently adopted by 48 states, the District of Columbia and the U.S. Virgin Islands. The DTSA prohibits both the improper “acquisition” of a trade secret as well as its “disclosure.” As the DTSA continues to make its first impressions on federal courts around the country, threshold questions have arisen concerning the timing of misappropriations and what theories of recovery apply under the freshly minted law. Continue reading “A Call to Arms: How Timing Matters Under the New Defend Trade Secrets Act”
By Bronwyn L. Roberts
As reported in The Boston Globe, the Massachusetts Senate and House concluded their legislative session on July 31, 2016, without passing noncompete reform legislation. This comes as a bit of a surprise as the House and Senate have in 2016 each passed a noncompete reform bill. Additionally, Governor Charlie Baker has, through a spokesperson, recently indicated support for the House bill that sought to restrict noncompetes by creating “Garden Leave,” consisting of payment during the restricted period of at least 50 percent of the employee’s annualized base salary. However, for those who have followed this process over the years, the fact that neither bill passed is consistent with many other failed attempts over the years to overhaul the Massachusetts noncompete landscape.
Thus, the noncompete reform debate, which has been ongoing in the Massachusetts legislature since at least 2009, continues. We will keep you updated.
On June 9, 2016, Duane Morris attorney Gregory S. Bombard moderated a panel at the Boston Bar Association on “Negotiating and Enforcing Protective Orders in Trade Secret Cases.” The panel discussed best practices for protecting a client’s secret information during litigation, from discovery through motion practice and trial. Michael R. Gottfried, the managing partner of Duane Morris’s Boston office, spoke about his experience using trade secret information at trial. Also on the panel were Kenneth Berman of Nutter, McClennen & Fish and Sarah Herlihy of Jackson Lewis.
For more information, please contact Mr. Gottfried or Mr. Bombard of the Boston office or the members of the Non-Compete and Trade Secrets Practice.
Shannon Hampton Sutherland, Co-Chair, Duane Morris Non-Compete and Trade Secrets Practice, http://www.duanemorris.com/attorneys/shannonhamptonsutherland.html, and
Corey M. Weideman, Duane Morris Associate, http://www.duanemorris.com/attorneys/coreymweideman.html
On May 20, 2016, in In re: M-I, LLC, d/b/a M-I Swaco, No. 14-1045, 2016 Tex. LEXIS 389 (Tex. May 20, 2016), the Texas Supreme Court issued its much anticipated first decision involving the Texas Uniform Trade Secrets Act (“TUTSA”). TUTSA, which became effective on September 1, 2013, updated Texas law governing trade secret matters by, among other things, providing an unambiguous definition of a “trade secret”, expanding injunctive relief, and authorizing recovery of attorneys’ fees for willful and malicious activity. TUTSA also includes a specific provision requiring trial courts to protect the secrecy of a trade secret through reasonable means. See TEX. CIV. PRAC. & REM. CODE § 134A.006. This section of TUTSA, and the extent to which a trial court must protect the secrecy of an alleged trade secret during an injunction hearing, was the focus of the Court’s attention in In re: M-I, LLC.
In In re: M-I, LLC, the Texas Supreme Court held that the due-process right of a party to have a designated representative present at an injunction hearing involving alleged trade secrets is not absolute, and the trial court abused its discretion when it summarily concluded – without first balancing the competing interests at stake – that excluding the defendant’s corporate witness from portions of the injunction hearing involving trade secrets would violate due process.
The basic facts of the trade secret case underlying the mandamus proceeding in In re: M-I, LLC are typical: an employee with a signed non-compete and confidentiality agreement left his job to work for one of his former employer’s competitors, and a dispute ensued shortly thereafter. The former employer, M-I, filed suit for trade secret misappropriation and sought injunctive relief against its former employee and his new employer, National Oilwell Varco, L.P. (“NOV”). Relying on Section 134A.006 of TUTSA, M-I requested that NOV’s corporate representative be excluded from the courtroom during a portion of the hearing on M-I’s application for temporary injunction. The trial court summarily denied M-I’s request, however, concluding that the exclusion of NOV’s designated representative would be a “total violation of due process.” Instead, the trial court admonished NOV’s representative not to disclose or use anything he heard in the courtroom. Concerned about disclosing testimony regarding its trade secrets to NOV and placing the secrecy of the alleged trade secrets at risk by doing so, M-I postponed the injunction hearing to file a mandamus request with an intermediate appellate court. The intermediate appellate court denied the mandamus request and M-I filed a new mandamus request to the Texas Supreme Court.
Mandamus relief is available, the Court noted, when the trial court abuses its discretion and no adequate appellate remedy exists. The Court first explained that there is no adequate appellate remedy for an erroneous order to disclose a trade secret before examining whether the trial court abused its discretion.
In conditionally granting M-I’s request for mandamus relief, the Texas Supreme Court held that the trial court abused its discretion by summarily refusing M-I’s request to conduct portions of the temporary injunction hearing outside the presence of the NOV’s designated representative. The Court explained that courts have discretion to exclude parties and their representatives in limited circumstances when “countervailing interests overcome [the] presumption” in favor of participation. Rather than summarily denying M-I’s request, the Court explained, the trial court was required, at a minimum, to balance the parties’ competing interests.
- First, the trial court was required to determine the degree of competitive harm M-I would have suffered from the dissemination of its alleged trade secrets to NOV’s corporate representative, including by considering the relative value of the alleged trade secrets and whether the NOV corporate representative was a competitive decision-maker.
- Second, the court was required to determine the degree to which NOV’s defense of M-I’s claims would be impaired by the representative’s exclusion at such a preliminary stage of the proceeding.
Importantly, the Court noted that, “[i]f the trial court conducted the required balancing, it may have been within its discretion to decide that due process required NOV’s designated representative to be present.” The trial court’s error was failing to conduct the balancing at all.
In short, TUTSA plaintiffs should not assume that the court will exclude the other side’s representative when alleged trade secrets are disclosed, and TUTSA defendants should not assume that the court will permit their representatives to participate in all phases of a TUTSA case. The trial court must develop a factual record to balance the parties’ countervailing interests before deciding whether to exclude a witness.
By: Shannon Hampton Sutherland
Experts predicted that strong M&A activity would continue from 2015 into 2016. So far, that prediction appears to hold true, particularly in the biotech sector. If you want to position your company for potential acquisition under attractive terms, either in 2016 or down the road, are you ready? Locking down the company’s “non-compete” and confidentiality agreements and practices early is mission-critical.
These agreements (including confidentiality and invention agreements, non-compete agreements, and non-solicit agreements) help the company protect legitimate business interests, like the benefit of its investment in its technology, confidential information, and trade secrets, goodwill with its customers, and training of its employees. If your company doesn’t have strong programs and agreements in place with its employees, independent contractors, and consultants to protect these important assets, it might lose value in the eyes of a potential acquirer.
This lesson holds especially true in industries that are heavily-reliant on sensitive technological innovation or field-based sales organizations. One of your highest priorities should be making sure that the company has strong and enforceable confidentiality and non-compete agreements (if permissible in your jurisdiction) with these individuals and programs in place to protect the company’s interests.
- Identify and Address Gaps in the Protection of Confidential Information. The company should work with legal counsel to identify potential gaps in its programs and procedures designed to protect its confidential information. For instance, how strong is the company’s network security? Does the company have strong policies and procedures in place concerning access to data that resides outside of the network? Are the company’s written policies being followed in practice? Does the company only grant access to such information on a need-to-know basis, or is information too readily available or left unprotected? Are sensitive materials identified as such? Does the company take reasonable steps to ensure that departing employees return, and do not retain access to, confidential information? A potential acquirer will want to see strong and consistent policies and procedures in place – and followed – to protect the assets it is acquiring.
- Address Agreements With New Employees on the Front-End. Although not required in all jurisdictions, it’s good practice to let a new candidate know that he or she will need to sign a confidentiality or non-compete agreement as a condition of employment (if appropriate for the position and permissible in your jurisdiction). Indeed, some jurisdictions have special rules about whether the employee must receive a copy of the agreement in advance, and when the new employee must sign the agreement. The company can work with HR and legal counsel with expertise in this area to ensure that the company is complying with any necessary requirements for new employees.
- Identify and Address Individuals Without Existing Agreements. HR and legal counsel should identify employees (and independent contractors and consultants) who have not signed confidentiality, invention, non-compete, and non-solicit agreements. For individuals who don’t have an agreement, but who have access to the company’s confidential information or goodwill, the company can work closely with legal counsel well-versed in this area to consider whether an agreement is appropriate and craft an agreement that will stand muster for position at issue and in the jurisdictions that might be implicated. For instance, in some jurisdictions, for an agreement signed after the commencement of employment to be enforceable, the company must provide additional consideration to the employee (such as a promotion, payment, or increased compensation).
- Consider Assignment and Successor Clauses. The company should consider with legal counsel whether to include provisions providing that the employee expressly consents to the assignment of the restrictive covenants by the company at any time, and that the restrictive covenants are enforceable by the company’s successors and assigns. That type of language isn’t required in all jurisdictions, but, in some jurisdictions, it may bolster a successor company’s or assignee’s ability to enforce the agreements – something a potential acquirer will look for when considering your company for potential acquisition.
- Identify and Remediate Potential Holes in Existing Agreements. Experienced legal counsel should also review existing agreements to determine any potential holes in those documents and whether adjustments can or should be made to both meet the company’s business needs and comply with any applicable law. For example, sometimes agreements in the employee’s file pre-date important clarifications in the law that must be addressed. Or, perhaps the existing agreement is written too narrowly so that it doesn’t protect the full extent of the company’s interests or current or planned business model. On the flip side, the agreement may be too heavy-handed or written so broadly that it won’t be enforceable at all under the law of a state that won’t reasonably modify an overly broad agreement. Counsel well-versed in non-competes can help the company identify and suggest ways to remediate these (and other) potential deficiencies before it’s too late.
Bottom line: Early and regular review of the company’s non-compete and confidentiality agreements and practices is an important piece of positioning the company for favorable acquisition. Counsel well-versed in this area can help the company navigate the complex issues that come into play.
Nothing contained in this blog is intended to or does create an attorney-client relationship or provide legal advice.
 Shannon Hampton Sutherland is the Co-Chair of the Duane Morris Non-Compete and Trade Secrets practice and a nationally-known non-compete, trade secrets, and litigation attorney. See http://www.duanemorris.com/attorneys/shannonhamptonsutherland.html.
 See, e.g., http://www.forbes.com/sites/jeffgolman/2016/01/11/four-reasons-2016-will-be-a-strong-year-for-ma/#27221a634d49 (last accessed Apr. 8, 2016); http://info.kpmg.us/ma-survey/index.html (last accessed Apr. 8, 2016).