RIGHT IN THE BREADBASKET: Lessons From Early Cases at the Intersection of Noncompetes and the DTSA

As many TSW readers are aware, 2016 has been a big year for trade secret law, with both the United States and the European Union expanding trade secrets protections and increasing the uniformity of their laws. But as good as this year has been for trade secrets protection, it’s been every bit as bad for noncompete agreements.

As we mentioned previously, earlier this summer the Illinois Attorney General filed suit against Jimmy John’s over its use of noncompete agreements with low-wage workers. In March 2016, the U.S. Department of Treasury issued a report that addressed the possible negative impact of noncompete agreements. The White House issued its own report in May, noting that noncompetes may depress wages, limit employee mobility, and inhibit innovation.  And in June 2016, two U.S. senators proposed the Mobility and Opportunity for Vulnerable Employees Act, which would prohibit the use of noncompete agreements for employees earning less than $31,200 per year.

So what happens at crossroads of trade secrets and noncompete claims (which are often brought together in the same lawsuit)? The DTSA specifically contemplates this, creating a carve-out for states like California that have laws banning noncompetes. In particular, the DTSA forbids injunctions that “otherwise conflict with an applicable state law prohibiting restraints on the practice of a lawful profession, trade or business.” And as we’ve previously blogged, courts have already reconciled these issues in California, tailoring injunctive relief in one of the early DTSA cases to align with the state’s public policy against noncompetes.

But how does this play out in jurisdictions that permit noncompetes?

Let’s stick with the Midwestern and carbohydrate-rich food themes from the Jimmy John’s Illinois AG action and take a look at a recent dispute between Panera Bread and Papa John’s Pizza. Earlier this month, a Missouri federal district court judge sided with Panera and issued a temporary restraining order (TRO) barring a former Panera IT executive from working at Papa John’s. Panera did however have to post a $200,000 bond to secure the remedy.

Panera brought the lawsuit in July 2016, naming the former IT executive Michael Nettles and Papa John’s as defendants. Nettles had spent four years as a vice president of architecture at Panera’s IT department; not a low-wage sandwich maker in a retail store. Nettles signed a confidentiality and noncompete agreement at the beginning of his employment in 2012 as well as an amended version in 2013, which he did not seek to negotiate and was supported by consideration. In June 2016, Nettles allegedly sent Panera CEO Ron Shaich an email stating he had accepted a position with Papa John’s and requested to be released from the noncompetition agreement. According to the complaint, Shaich denied the request, offered to find Nettles another job at a non-competitor company, and had Nettles escorted off the premises. Nettles started at Papa John’s about two weeks later on July 18, 2016. Panera sued two days after that, accusing Nettles of breaching noncompete and nondisclosure agreements and misappropriating company trade secrets in violation of the Missouri Uniform Trade Secrets Act and the newly-enacted federal Defend Trade Secrets Act (DTSA) and promptly moved for a TRO.

The defendants argued the noncompete was unenforceable partly because Panera and Papa John’s are not actually competitors, but the judge disagreed, citing evidence that both companies “target a so-called ‘clean ingredient consumer.” The Court also pointed out that Papa John’s was expressly listed as a competitor (along with 28 other companies) in the noncompete that Nettles signed, finding the list of 29 competitors memorialized in the agreement to be reasonable. In addition, the one year ban was found a reasonable restrain, citing Missouri law permitting two year noncompetes.

The court also found that Panera was likely to succeed on the merits of its trade secrets claims under Missouri law, noting that Nettles “was privy to and worked extensively with Panera’s trade secrets regarding such matters as innovations in ordering and delivery technologies.” The court was also concerned with the fact that evidence suggested that Nettles had not just deleted certain Panera documents from his personal computer but also restored the computer to its “factory state.”  Interestingly, the Court in a footnote noted that Panera also was likely to prevail under the DTSA, but did not provide a separate analysis.

As for the showing of “irreparable harm” needed to sustain a TRO, the judge said Nettles would almost necessarily disclose trade secrets if were to start working for Papa John’s. Although neither Missouri nor the Eighth Circuit have explicitly adopted the doctrine of “inevitable disclosure,” the court found that “the rationale underpinning such a theory [was] helpful to understanding why Nettles’ performance of his new role would almost certainly require him to draw upon and use trade secrets and the confidential strategic planning to which he was privy at Panera.” The Court also pointed to the contract language that breach of confidentiality was deemed irreparable harm in support.

Now, having properly carbo loaded, businesses should take a close look at their confidentiality or trade secret and non-compete agreements with high- and low-wage employees and contractors. Among other things, companies are well advised to make sure all such agreements include reference to DTSA’s whistleblower immunity provision.