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.
Last week, we examined the recent Third Circuit decision in Advanced Fluid Systems, which held that a trade secrets plaintiff did not need to be an owner or a licensee of the alleged trade secrets to bring a state law misappropriation claim under Pennsylvania’s UTSA—all that was required was that the plaintiff had “lawful possession” of the trade secrets. In so holding, the Third Circuit added to the weight of the Fourth Circuit’s similar analysis of Maryland’s UTSA in DTM Research, L.L.C. v. AT&T Corp., 245 F.3d 327 (4th Cir. 2001).
In the midst of nationwide efforts to reform the use of non-compete restrictions, a recent decision from the Eastern District of Pennsylvania illustrates the broad approach courts may take when enforcing restrictive covenants against high-level executives. READ MORE
The Ninth Circuit recently certified a question to the California Supreme Court regarding the scope of California Business & Professions Code Section 16600. As TSW readers are likely aware, Section 16600 states that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” Pursuant to this statute, California courts have struck down a number of restrictive covenants in contracts with employees in California, including non-compete provisions, customer non-solicit provisions, and certain employee non-solicit provisions. The Ninth Circuit now wants to know whether the statute should apply to an agreement between two businesses. The Supreme Court’s answer may have significant effects on business agreements and collaborations in or involving California. READ MORE
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.
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
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
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
Oregon recently enacted HB2992, further limiting its already restrictive non-compete law, which will apply to any agreements entered on or after January 1, 2020. The new law amends Oregon’s prior non-compete law by requiring the employer, as a condition of the non-compete’ s enforceability, to provide a signed, written copy of the terms of the non-compete agreement to the employee within thirty days of the termination of employment. This is effectively a mandatory reminder, as Oregon’s non-compete law already required the employer to inform the employee at the outset of employment of the non-compete agreement, either two weeks prior to the employee’s first day of employment or as part of a bona fide advancement of the employee. Oregon’s non-compete law also already required that the employee be in an “administrative, executive, or professional” position and have access to trade secrets, other competitively sensitive information, or be “on-air” talent subject to other restrictions.
Oregon’s state legislature thus created a new hoop for employers to jump through before it can subject a limited subset of employees to non-competes. Oregon’s mandatory reminder at the end of an employee’s employment, and not just at the beginning, further aligns its non-compete law with one of the Obama administration’s final mandates for state legislators to improve the transparency and fairness of non-competes.