Use of Out-of-State Restrictive Covenants Ending Quickly in California

Two years ago, TSW reported on several cases in which corporations outside of California successfully enforced non-compete agreements against California employees.  They did so by using employment agreements containing foreign choice-of-law provisions and foreign forum-selection provisions.

We also reported that California had taken measures to correct this “loophole” by enacting California Labor Code section 925.  Section 925, which went into effect on January 1, 2017, forbids employers from requiring employees to agree to foreign forum-selection and choice-of-law provisions as a condition of employment.  It only applies to employees who primarily reside and work in California and who were not represented by counsel in negotiating the forum-selection or choice-of-law provisions.  Its application is also restricted to contracts that have been “entered into, modified, or extended on or after January 1, 2017.”

At the time of our prior article, California courts had yet to apply the statute.  In light of recent inquiries and requests from TSW readers, however, we’ve decide to provide an update on section 925 and its application.

As expected, courts have refused to apply section 925 when considering older contracts that have not been recently modified.  See e.g., Scales v. Badger Daylighting Corp., No. 117CV00222DADJLT, 2017 WL 2379933, at *1 (E.D. Cal. June 1, 2017) (declining to apply section 925 to pre-2017 contract).  The statute, by its own terms, does not affect such contracts, and California Courts have specifically rejected an argument that section 925 evidences California Public Policy that should retroactively reach pre-2017 contracts.  Ryze Claim Sols. LLC v. Superior Court, 33 Cal. App. 5th 1066, 1072 (2019) (reversing “trial court’s decision to apply the policy expressed in Labor Code section 925 to [the employment agreement at issue], which was not entered into, modified, or extended on or after January 1, 2017.”)

It also comes as no surprise that courts have cited to section 925 in deciding not to enforce foreign forum-selection and choice-of-law provisions.  See Depuy Synthes Sales Inc. v. Stryker Corp., No. EDCV181557FMOKKX, 2019 WL 1601384 (C.D. Cal. Feb. 5, 2019) (declining to enforce form-selection and choice-of-law provisions and denying defendant’s motion to transfer action to the District of New Jersey).  In other words, the law appears to be working as intended.

Much of the litigation in this area has involved disputes about whether an older contract has been sufficiently “modified” or “extended” after January 1, 2017 such that it falls within the purview of section 925.

In Yates v. Norsk Titanium US, Inc., No. SACV1701089AGSKX, 2017 WL 8232188, at *3 (C.D. Cal. Sept. 20, 2017), the court found that section 925 did not apply to a pre-2017 contract and thus upheld the contract’s forum-selection clause and granted the motion to transfer.  The employee argued that section 925 should apply to the contract because it had been modified through an “implied-in-fact” modification after January 1, 2017.  The Court rejected this argument because the contract expressly stated that any amendment must be “in a writing signed and dated by both parties.”

Subsequent cases, in contrast, have generally applied section 925 when certain changes to the employee’s employment occurs (e.g., a change in compensation structure).  See e.g., Geoffrey Friedman, et al. v. Glob. Payments Inc., et al., No. CV183038FMOFFMX, 2019 WL 1718690, at *3 (C.D. Cal. Feb. 5, 2019) (applying section 925 to a pre-2017 contract because the employer modified the “Sales Policy Manual” after January 1, 2017 thereby affecting the employees compensation); Lyon v. Neustar, Inc., No. 219CV00371KJMKJN, 2019 WL 1978802, at *7 (E.D. Cal. May 3, 2019) (applying section 925 to a pre-2017 employment agreement because the employee signed a separation agreement when he left that modified the prior employment agreement).

Accordingly, while certain older and unmodified contracts may remain effective, the number of such contracts is shrinking quickly.  In some cases, the courts appear to be applying section 925 aggressively to sweep in older contracts that have even minor modifications after January 1, 2017.

The DOJ’s China Initiative—Protecting Your Assets

As anticipated in May, rising trade tensions between the U.S. and China have led to a series of escalating measures including tariffs and trade investigations.  In July 2019 testimony to the Senate Judiciary Committee, FBI Director Christopher Wray noted that more than 1,000 active investigations on intellectual property theft “lead[] back to China.”  Against the backdrop of these issues, the Department of Justice announced the “China Initiative” on November 1, 2018.  The DOJ explained that the Initiative was launched against the background of prior findings by the Administration regarding China’s trade practices.  One of the China Initiative’s key goals is to “[i]dentify priority trade secret cases, ensure that investigations are adequately resourced; and work to bring them to fruition in a timely manner and according to the facts and applicable law.” READ MORE

Global Reach: U.S. Federal Rules Provide Assistance for Discovery in Foreign Matters

Imagine the following scenario: Your company has filed several lawsuits around the world, all concerning generally the same subject matter, but against different parties because of jurisdictional limitations. The litigation overseas is subject to discovery rules that are far more limited than those available in the United States. The U.S. litigation has been stayed pending the result of the foreign matter. However, important information and witnesses that are useful in prosecuting the foreign litigation are located in the U.S., outside of the foreign court’s jurisdiction and applicable discovery rules. In this complex situation, is there any way to obtain that critical bit of information? Or can the U.S. witnesses evade all production and testimony because of jurisdictional bounds? READ MORE

Washington Restricts Use of Non-Competition Agreements

Earlier this year, Washington adopted a new law—Engrossed Substitute House Bill 1450—that places significant restrictions on the enforceability of non-competition agreements. The law applies to “every written or oral covenant, agreement, or contract by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind.” Importantly, the law does not address nonsolicitation, confidentiality, or trade secrets agreements. Employers using non-competition agreements should understand the key provisions of the law—which takes effect on January 1, 2020—and how they affect their non-competition agreements. READ MORE

Worried About Trade Secret Poaching? Check in With Your Third-party Service Providers

Hiring external contractors is common practice in the fast-paced tech-industry where talent is scarce and in high-demand, but such a practice can expose a company’s most valuable IP to the confidentiality measures, or lack thereof, of those external contractors. This type of common business model is an area ripe for trade secret theft. University Accounting Services (“UAS”) alleges that this is exactly what happened when their point person at ScholarChip, an external tech company hired by UAS to design and maintain their tuition collection software “eUAS,” left ScholarChip and formed a product in direct competition with UAS. UAS filed suit in Oregon against ScholarChip and its former employee, and both filed a motion for summary judgement. The court denied the motion and held that there were genuine disputes of material fact surrounding the breach of contract and misappropriation of trade secrets claims, among others. READ MORE

Are State Governments Immune From Suit For Misappropriation Of Trade Secrets?

You are a state-government contractor. You respond to an RFP issued by a state-government entity. In your bid proposal, you submit documents that contain your trade secrets. You do not get the contract, but you later learn that the state-government entity gave your trade secret information to your direct competitor who did get the contract. Do you have any options under federal or state trade secret laws to sue the state? READ MORE

Texas Jury Rejects Digital Marketing Company’s $50 Million Trade Secret Misappropriation Claim

After a weeklong June trial, a Texas federal jury awarded Six Dimensions, Inc. (“Six Dimensions”), a digital marketing firm, $287,000 for its breach-of-contract claim against its former employee but rejected its behemoth $50 million claim for trade secret misappropriation against its competitor, Perficient Inc. (“Perficient”). READ MORE

Two Wrongs Don’t Make a Right – Trade Secrets Saga Concludes With No Damages Awarded

On Wednesday, a federal jury in the Eastern District of Texas declined to award any damages to Huawei Technologies Co., the world’s largest telecommunications company, stemming from its allegations of trade secret theft, employee poaching, and restrictive covenant violations against former employee Yiren Ronnie Huang (“Huang”) and startup CNEX Labs, Inc. (“CNEX”). Huang and CNEX, in turn, asserted counterclaims of trade secret theft against Huawei. Although the jury found Huang violated his post-employment obligations to Huawei and that Huawei misappropriated CNEX’s trade secrets, the jury did not award damages to either party. The verdict came after a contentious three-week trial before Judge Amos Mazzant on the parties’ dueling trade secret claims.

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Making Memories: Trade Secrets Need Not Be in Tangible Form to Be Protectable

Developments in technology have led to advanced ways of protecting trade secrets. In an age where passwords, metadata, and paper trails are often the stories told to demonstrate misappropriation, it may seem that trade secrets must be reduced to a tangible form to be protected. However, a recent Oregon Court of Appeals opinion reminds us that this is not the case—if information is maintained as a trade secret it is equally protected regardless of form. READ MORE