With the holidays behind us and our calendars flipped over to 2019, we’re taking a look back at some key trade secrets developments of the past year. Here are some of the big cases and legislative developments from 2018.
Massachusetts Adopted the UTSA
Starting with legislation, Massachusetts made headlines in August when it enacted a new law that, in addition to adopting the UTSA, places limitations on noncompete agreements. With the new law, Massachusetts becomes the 49th state to adopt some form of the UTSA, leaving New York as the lone holdout. Among other things, the new law:
- Limits the period of no competition to one year.
- Applies to independent contractors as well as employees.
- Prevents noncompetes from being used with non-exempt employees, students who work part time, or employees who were terminated without cause or laid off.
- Does not allow continued employment to count as sufficient consideration for noncompetes.
- Requires that, if entered into at the commencement of employment, the noncompete be signed by both the employer and employee and state that the employee has the right to seek counsel prior to signing.
- Contains a “garden leave” provision which states that, during the period of no competition, the employee must be paid at least 50% of his/her highest annualized base salary for two years preceding termination. However, an employer may comply with this requirement by providing “other mutually agreed-upon consideration.”
Part of the push for new limitations on noncompetes in Massachusetts stemmed from a desire for (primarily) Boston-based tech companies to compete on even footing with their counterparts in California, which has a longstanding tradition of limiting noncompetes.
Moving now to the West Coast, the next case offers some insight into the contours of California law on restrictive covenants.
New Development in California Non-Solicitation Clauses
In November, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., a California appellate court held that an agreement prohibiting former staffing company recruiters from soliciting their former employer’s employees was unenforceable under section 16600. The court reasoned that the employee non-solicitation provision was too onerous on the recruiters’ ability to practice their profession, i.e., recruiting. In rendering the decision, the court expressly “doubt[e]d the continuing viability” of Loral Corp. v. Moyes, a long-standing and frequently-cited case from 1985, which upheld use of non-solicitation provisions. The court opined that Moyes’ reliance on a reasonableness standard conflicted with the California Supreme Court’s 2008 decision in Edwards v. Arthur Andersen LLP, which rejected a “reasonableness” standard when applying section 16600. The court further distinguished Moyes on its facts by noting that the non-solicitation provision in AMN restrained the recruiters from practicing their profession – recruiting.
New York Made It Harder for Plaintiffs to Say “Show Me the Money”
Finally, plaintiffs in New York state trade secrets cases face a new limitation on their damages claims, according to a decision in May from a state appellate court. In E.J. Brooks Co. v. Cambridge Security Seals, in a 4-3 opinion, the court held that compensatory damages for trade secrets misappropriation are limited to the amount actually lost by the plaintiff, and cannot extend to the “hypothetical” amount saved by the alleged infringer on research or development. The decision stemmed from trade secret litigation between two competitors in the plastic security-seal business. At trial, the plaintiff’s damages expert testified that without the allegedly misappropriated information, the defendant would have had to spend between $6.1 million and $12.2 million in order to develop its manufacturing machinery. The trial court judge charged the jury on the avoided costs theory alone, and the jury awarded a $3.9 million judgment based on compensatory damages only.
This decision sets a bright line for plaintiffs in New York, couching damages claims firmly in the context of plaintiff’s actual loss, and insulating defendants from damages awards based on their in-house development and research costs. Plaintiffs and defendants alike can now look forward to litigation narrowly focused on the plaintiff’s alleged economic injuries. However, as noted by the minority, the decision sets New York apart from other jurisdictions which allow damages based on either the plaintiff’s losses, the defendant’s gain, or even—as in the Fifth Circuit—a “reasonable royalty.”
TSW wishes our readers a happy and successful new year. And if protecting your trade secrets or other valuable information is on your list of 2019 resolutions, please feel free to reach out to someone from the Orrick team to help you meet those goals.