Employee non-compete agreements have long played an important role in employers’ ability to protect confidential and trade secret information. However, recognizing the distinct advantage employers often enjoy in negotiating such agreements, there has been a well-documented trend in recent years toward greater scrutiny of—and even hostility toward—employee non-competes.
Posts by: Glenn Dassoff
Trial and Error Under the China Initiative
If you have seen any of our prior articles concerning the China Initiative, you know the U.S. Department of Justice (“DOJ”) is still focused on actively investigating individuals with ties to China who are suspected of trade secrets theft. However, the failure of recent China Initiative prosecutions raises an issue as to which companies involved in academic and scientific research may be targeted going forward.
Chinese and Russian Hackers Targeting COVID-19 Vaccine Research
The latest development in the Department of Justice’s “China Initiative” occurred earlier this month, as the DOJ unsealed an 11-count indictment charging two Chinese nationals with stealing hundreds of millions of dollars’ worth of “trade secrets, intellectual property, and other valuable business information”— including potential COVID-19 research. The two Chinese hackers allegedly worked for their own benefit and together with the Ministry of State Security, China’s intelligence and security agency, to infiltrate the electronic networks of a number of targets including several American biotech firms “publicly known for work on COVID-19 vaccines, treatments, and testing technology.” READ MORE
Ajaxo v. E*Trade: How (Not) to Prove a Reasonable Royalty for Trade Secret Misappropriation
The latest appellate decision in the nearly 20-year legal battle between Ajaxo and E*Trade highlights the importance of expert discovery and a well-developed trial court record for a plaintiff attempting to claim reasonable royalties for trade secret misappropriation.
The saga between Ajaxo and E*Trade began back in the late 1990s, with Ajaxo, a six-person company, approaching E*Trade, seeking to support its wireless access and trading business. In response, E*Trade asked Ajaxo for a technical paper and live demonstrations, during which E*Trade’s engineers peppered Ajaxo with questions. One E*Trade senior engineer, Dan Baca, made a copy of Ajaxo’s technical binder. After E*Trade sent Ajaxo a draft letter of intent—with everything but the dollar amount filled in—E*Trade had a change of heart and told Ajaxo it was simply too small to be an E*Trade partner. Instead, E*Trade acquired these services a short time later from Everypath, a company that it had been meeting with simultaneously, and where Dan Baca started to work shortly after attending the Ajaxo meetings. READ MORE
Court Upholds One Year in Prison for Theft of non-Trade Secrets
A federal district court judge in Chicago sentenced Robert O’Rourke, a former employee of iron bar manufacturer Dura-Bar, to one year and one day in prison last week for stealing trade secrets. Well, not quite. O’Rourke was convicted on February 25 of seven counts of stealing and attempting to steal trade secrets, but moved for a new trial. In her October 11 order, Judge Andrea Wood denied the motion, holding that the trial evidence demonstrated O’Rourke’s intent to steal and use trade secrets—even if some of the proprietary information stolen did not actually constitute a trade secret. READ MORE
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
Another California Court Raises Doubts on Employee Non-Solicitation Provisions
Last November, we discussed the potential impact of a recent California appellate court decision, AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5th 923 (2018), which called into question long-standing California precedent enforcing certain employee non-solicitation provisions. However, we noted it was too soon to forecast the implications of that case.
Though it is still early, it appears the tide may be turning, as a California federal district court recently issued a decision that relied upon AMN’s holding and found that the employee non-solicitation provision in the plaintiff’s contract was unenforceable under California law.
Fishing for ESI
When National Fish and Seafood’s (NFS) head of research left for a new opportunity at Tampa Bay Fisheries, she may not have taken just her talents to the competition. According to NFS’ lawsuit, the former employee transferred thousands of files containing confidential and proprietary information prior to her departure from the company. NFS also alleges that the CEO of Tampa Bay Fisheries conspired with NFS’s former employee to steal trade secrets involving its proprietary clam production process.
Engineering a DTSA Claim: District Court Allows Broad Allegations to Survive Motion to Dismiss
The strange contraption in this photo is at the heart of a recent decision regarding the pleading standard for DTSA claims. On June 15, Eastern District of Pennsylvania Judge Juan Sanchez denied a motion to dismiss counts of trade secret misappropriation against Joshua Andrew Adams, a former project engineer for PDC Machines, Inc. who left the company and later joined Nel Hydrogen A/S. PDC and Nel collaborated in 2008 to develop high-pressure hydrogen gas diaphragm compressors and signed a nondisclosure agreement (NDA) barring Nel from replicating or reverse engineering the technology. Adams was also subject to an NDA that prohibited him from using any of PDC’s confidential information and trade secrets without written permission. In the complaint, PDC asserts that Adams now works for Nel, and that Nel has filed at least one patent application listing Adams as the inventor for a high-pressure diaphragm hydrogen compressor that is nearly identical to PDC’s version. READ MORE