North Texas Legal News
Original Commentary on Non-Compete and Trade Secrets Law
Three Key Factors in Enforcing Non-Compete Agreements
What distinguishes those companies that are successful in enforcing their non-compete agreements from those that are not? Generally speaking, just three “no-brainer” factors:
1. They have good agreements. A non-compete enforcement lawsuit is a breach of contract case. Thus, those companies that have good agreements – the ones that set out reasonable restrictions, are clear and unambiguous, are signed by all the necessary parties, and are supported by proper consideration – have an advantage in court.
The courts around the country scrutinize the language of non-compete agreements before deciding whether to restrict employees’ activities based on that language. The more vague, incomprehensible, unreasonable the restraints in the agreements are, the less the likely the courts are to order employees to comply with them.
2. They have evidence of violations. Suspicions, rumors, or fear that an employee might be violating a non-compete agreement are not enough to support an injunction in court. Those companies that are successful in enforcing their non-compete agreements usually come to court with some evidence that an employee either has already violated the agreement or intends to imminently do so. The evidence does not have to be direct, i.e., employee admitting to someone that they are violating the agreement, and it may be circumstantial, but an application to enforce an agreement must be supported by some evidence and not just a fear or speculation.
3. They move quickly. Those companies that are successful in enforcing their non-compete agreements do not wait around to see how far an employee will go or what s/he employee might do. Once they have evidence of a violation, they file a lawsuit within days of obtaining such evidence. A swift action impresses upon a judge that the business is going to suffer irreparable harm unless the court steps in and enters an order preventing an employee from violating his or her non-compete agreement.
Keep in mind that all is not lost for those companies that do not have signed non-compete agreements with their employees as employees have certain duties to their employers even in the absence of an employment contract restricting their post-employment activities.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. His practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108. Business Directory
The Fifth Circuit Issues Its First Decision on the Defend Trade Secrets Act
Two and a half years after the Defend Trade Secrets Act (DTSA) became effective, the Fifth Circuit has issued its first opinion addressing the statute. Earlier this month, the Court ruled that: (1) a party must “prevail” before it can recover any attorney’s fees under the DTSA and (2) a plaintiff’s dismissal of its claims without prejudice does not confer the “prevailing party” status on defendants.
Dunster Live, LLC v. Lonestar Logos Management Company, LLC involved a situation where the plaintiff, Dunster, having lost an injunction hearing in a trade secrets case in federal court, wanted to dismiss the case without prejudice and refile it in a state court sans the DTSA claim. Under 41(a)(2) of the Federal Rules of Civil Procedure, if a defendant has already answered the lawsuit or filed a motion for summary judgment, plaintiff is required to file a motion with the court asking for a permission to dismiss its claims without prejudice. The district court granted Dunster’s motion to dismiss, and the plaintiff proceeded to file an almost identical trade secrets lawsuit but without the DTSA claim in a state court.
After the dismissal, Lonestar sought to recover its attorney’s fees of over $600,000 on the basis that Dunster had brought its federal lawsuit in “bad faith.” The district court denied Lonestar’s request for attorney’s fees holding that a dismissal without prejudice of Dunster’s claims did not make Lonestar a “prevailing party” under the DTSA.
Lonestar furter argued that Dunster sought to evade paying attorneys fees by strategically seeking a dismissal without prejudice once it realized that its lawsuit was doomed, and that the DTSA’s “bad faith” provision supported a fee award even when a defendant had not officially prevailed. The DTSA’s provision upon which Lonestar relied states the following:
[i]f a claim of the misappropriation is made in bad faith, which may be established by circumstantial evidence, a motion to terminate an injunction is made or opposed in bad faith, or the trade secret was willfully and maliciously misappropriated, [a court may] award reasonable attorney’s fees to the prevailing party. 18 U.S.C. 1836(b)(3)(D).
The district court rejected this argument as well denying Lonestar’s request for attorney’s fees.
The Fifth Circuit affirmed the district court’s ruling finding that a dismissal without prejudice under the DTSA did not confer the status of a “prevailing party” on Lonestar, similar to other federal statutes that allow prevailing parties to recover attorney’s fees, such as the Equal Access to Justice Act, Patent Act, Civil Rights Act, or Individuals with Disabilities Education Act.
The Court also rejected Lonestar’s argument that the DTSA only required a showing of “bad faith” by a plaintiff in filing a lawsuit and not a showing that a defendant was a “prevailing party.” It explained that “[a]llowing bad faith alone to support a fee award would improperly read the concluding language of Section 1836(b)(3)(D) – ‘the prevailing party’ – out of the statute.” Thus, a party seeking attorney’s fees under the DTSA must establish both: (1) that it is a prevailing party and (2) one of the three qualifying scenarios described in 1836(b)(3)(D).
TAKEAWAY: With the DTSA becoming effective on May 11, 2016, plaintiffs in Texas now have a choice of whether to seek redress for trade secrets misappropriation in state courts or federal courts. Dunster makes it clear that as long as plaintiff has brought its DTSA claim in good faith in federal court, it may have a chance to change the strategy down the road and explore its claims in state court without facing the penalty of having to pay defendant’s attorneys fees as the result of dismissing its federal lawsuit without prejudice.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. His practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.
Non-Compete Agreements: Garbage In, Garbage Out
Last week, a Texas Court of Appeals ruled that a non-compete agreement between a transportation logistics broker and its freight carrier was unreasonable because it was not clear when the 24-month non-compete period would begin to run. This case serves as a reminder that a confusing, ambiguous, or imprecise non-compete agreement will yield poor results in court. In other words: garbage in, garbage out.
The covenant not to compete at issue was meant to ensure that the freight carrier would not take away the broker’s clients after the broker had revealed their identity to the carrier. Thus, there was a legitimate business reason for the non-compete agreement. However, the following language in the agreement created a problem:
For a period of twenty four (24) months following the Carrier’s last contact with any client or client[s] of Broker the Carrier agrees it shall not either directly or indirectly influence or attempt to influence customers or clients of Broker (or any of its present or future subsidiaries or affiliates) for whom the Carrier has rendered services pursuant to this Agreement to divert their business to the Carrier or any individual, partnership, firm, corporation or other entity then in competition or planning to be in competition in the future with the business of Broker or any subsidiary or affiliate of Broker.
The Court explained that there were two problems with this language that made it impossible to determine how long the restrictive covenant was going to last. First, under the terms of the covenant not to compete, the 24-month restraint period would start from the date of the carrier’s last contact with “any” client of the broker, not just the clients that the carrier had provided services to. Since the broker testified that its client list was a trade secret, the carrier would have no way of determining the date of its last contact with the clients whose identity it had no way of knowing. Second, the non-compete would begin to run from the date of the last contact, regardless of whether the contact took place during or after the broker-carrier agreement had terminated, which meant that it could begin at any time.
Consequently, the Court ruled that a covenant not to compete that extended for an indeterminable amount of time was not reasonable, and as a result, was not enforceable. It reversed the jury’s finding that the agreement had been breached and took away the damages the jury had awarded to the broker.
BOTTOM LINE: There are plenty of “sample” non-compete agreement “forms” online, but there is a difference between a non-compete clause and a non-compete clause that is enforceable. Unfortunately, many companies do not find that out until they are in court trying to enforce their agreements that may not be enforceable. Companies should avoid using “standard” non-compete clauses and make sure that their restraints are tightly drafted to address their specific industry, business model, and particular needs.
Leiza litigates trade secrets and non-compete agreements disputes in a variety of industries. If you are a party to a dispute involving a non-compete agreement or theft of confidential information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
The Two Steps All Small Businesses Can Take to Protect Their Trade Secrets
Does your business have a client list? A tested marketing strategy? A sales script? A proprietary business process? Those are just a few things that may give your company a competitive advantage over other similar businesses and may be considered your company’s “trade secrets.”
Now imagine one of your employees walking out the door and taking that information to a competitor because they offered him or her a slightly better compensation or using it to start their own copycat business. This happens on a daily basis. Yet, when it does, many business owners are not prepared to deal with it and have done nothing to address it ahead of time.
So, if your company does nothing else in 2019 to protect its trade secrets, it should do at least the following two things to prevent its competitive information from walking out the door with the next employee who leaves:
Have your employees sign confidentiality and non-competition/non-solicitation agreements. These agreements do not have to be complex, but they have to comply with the laws of the state where your company operates and possibly with the laws of the states where the employees work. So, for example, if your company is based in Texas, but you have employees in other states, your confidentiality and non-compete/non-solicit agreements must meet Texas-specific requirements for such agreements and may also need to comply with the laws of other states.
If you think these agreements are not enforceable, check our my prior post addressing the most common misconceptions about non-compete agreements.
Learn about the security features of the document management systems you use and implement them. Many small businesses use Google, Microsoft 360, Dropbox or some other similar systems to maintain and manage company records. All of those systems allow the administrator to: (1) set restrictions on which employees can access which information within the company; (2) track what the employees do with that information when they access it; (3) set restrictions on whether the employees can print, download, copy or share the information with other employees or people outside the company; (4) periodically change passwords to access the systems; and (5) many other features that can help business owners prevent their information being shared outside the company.
Additionally, many other programs, applications, CRM and ERP systems, sales databases, etc., have their own settings that restrict how the sensitive and proprietary information contained in them can be shared within and outside the company. Business owners should determine who within the company should have access to which parts of each system, limit such access on the “need-to-know” basis and set the systems to either prevent individuals from downloading, printing, emailing or otherwise exporting the information out of the system, or alerting the company when such actions are taken. Regardless of whether a business sets the alerts or restrictions, at a minimum, each company system should keep track or log what employees are doing with respect to the sensitive information they use in the course of their work.
Additionally, anytime you consider purchasing a new document management systems, or an ERP, CRM, sales system or databases, consider not only whether it matches your business needs, but also what security measures it offers in terms of tracking and limiting access to the system by the employees.
BOTTOM LINE: Large companies can dedicate a lot of resources to protecting their trade secrets – resources that are not available to small businesses. However, every small business has the resources to implement the two steps described above. If you, as the owner of the company, do not take the time to put the proper employee agreements in place and to educate yourself about the security measures available to you and use them, the employees will know the security gaps and will be in position to exploit them when presented with the right incentives.
Leiza litigates trade secrets and non-compete agreements disputes in a variety of industries. If you are a party to a dispute involving a non-compete agreement or theft of confidential information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
Is Credit Card Information Stored by a Restaurant a “Trade Secret”?
A federal district court in Colorado recently ruled that customer credit card information was not a “trade secret” under the federal Defend Trade Secrets Act (DTSA).
This case arose out of a 2017 data breach of Chipotle Mexican Grill, Inc.’s computer system and point of service (POS) terminals which resulted in the theft of customers’ credit card and debit card data. As the result of the breach, several financial institutions had to replace their members’ credit and debit cards and refund fraudulent payments. Consequently, they sued Chipotle for negligence, unfair competition, and a violation of the DTSA, on behalf of themselves and other financial institutions.
Plaintiffs argued that the credit card information of their members was a “trade secret” under the DTSA because: (1) it was plaintiffs’ financial data; (2) they had taken reasonable measure to keep it secret; and (3) the data had independent economic value, and that Chipotle misappropriated it in violation of the federal statute.
The district court noted that the question of whether the credit card information was a trade secret was a question of first impression as neither plaintiffs not Chipotle cited any authority clearly addressing this issue. However, it concluded that because the credit card information simply created an access mechanism for the members’ accounts, it had no independent value. In other words, the value of the credit card information derived from the thing that it was intended to protect – a bank account. See N. Star Media, LLC v. Winogradsky-Sobel, 2011 WL 13220157, at *10-11 (C.D. Cal. May 23, 2011); State Analysis, Inc. v. Am. Fin. Servs. Assoc., 621 F. Supp. 2d 309, 321 (E.D. Va. 2009); see also MicroStrategy Inc. v. Bus. Objects, S.A., 331 F. Supp. 2d 396, 429 (E.D. Va. 2004)(expressing skepticism that a CD key is a trade secret); Tryco, Inc. v. U.S. Med. Source, L.L.C., 80 Va. Cir. 619 (2010) (“Courts have repeatedly held that collections of numbers and/or letters, whose only value is to access other potentially valuable information, do not by themselves have independent economic value.”).
The court reasoned that the payment card data (including cardholder names, credit or debit card numbers, and corresponding CVVs) was similar to passwords and usernames that provided access to something of value, i.e. an individual’s line of credit with a financial institution or money in an account with a financial institution. Absent a connection to either a line of credit or a bank account, payment card data was simply a string of alpha or numeric (or indeed other typographical) symbols, and, thus, had no independent economic value.
Because the court concluded that the credit card information was not a trade secret, it did not address whether a misappropriation occurred during the breach or whether Chipotle could be liable under the DTSA.
Leiza litigates trade secrets and non-compete agreements disputes in a variety of industries. If you are a party to a dispute involving a non-compete agreement or theft of confidential information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
How Enforceable is a Non-Compete? and Other Top Google Questions Answered
According to Google, the top four questions people want answered about non-compete agreements* are: (1) How enforceable is a non-compete? (2) Is a non compete valid if you are fired? (3) Do non-compete agreements hold up? and (4) How long does a non compete last? I hear a lot of the same questions in person, so here are the answers:
1. How enforceable is a non-compete? Generally speaking, non-compete agreements are enforceable. There are only three states in the country that outright ban non-compete agreements – California, Oklahoma, and North Dakota. Additionally, some states now prohibit non-compete agreements for certain professions or employees who earn less than a certain amount per year or per hour. The rest of the states will enforce some form of a non-compete agreement as long as it is reasonable.
Now, if the real question is “How enforceable is my non-compete agreement?”, the answer to that depends on several factors, including the following: (1) the state in which the employee works; (2) the industry in which s/he works; (3) the precise language of the non-compete clause; (4) the responsibilities and duties of the employee at the company; (4) how long the employee has worked for the employer; (5) where the employee is going to work and what will be his/her duties and responsibilities there; (6) what the employee received in exchange for signing the non-compete agreement; (7) whether the employer performed his/her obligations under the agreement; and several other factors.
2. Is a non-compete valid if you are fired? Usually, yes. However, some states have recently passed laws or have attempted to pass laws that would make non-compete agreements void if an employee was fired without cause or terminated as part of the reduction in force. Additionally, some employment contracts may specify when an employee may be fired, in which case, if the employee is fired in violation of their contract, that may make their non-compete clause unenforceable. The norm across the United States, however, remains that the reason for separation from employment does not affect the enforceability of a non-compete clause.
3. Do non-compete agreements hold up? When written correctly, yes. If a non-compete agreement is written to comply with the appropriate state laws, is reasonable, and the employer has given its employees the required consideration in exchange for their promise not to compete, the non-compete agreement is likely to hold up in court, which means the court will order an employee to comply with it.
However, similarly to the question one above, whether your particular non-compete agreement will hold up in court, depends on many factors, including where in the country and in which venue the employer will attempt to enforce it.
4. How long does a non-compete agreement last? As a general rule, non-compete agreements that last two years or less are considered reasonable. However, some states have specific provisions regarding the length of non-compete agreements that set a shorter period of time, and other states allow for much longer periods. Additionally, employee-specific circumstances may make even a 2-year non-compete agreement unreasonable and, therefore, not enforceable in certain cases.
*NOTE: Different rules may apply to non-compete agreements that are not employment-related, i.e. non-compete agreements that relate to the sale of business.
BOTTOM LINE: Different states have different rules about what non-compete agreements they will enforce. Additionally, whether a particular non-compete agreement is enforceable depends on the (1) language of the agreement and (2) the particular circumstances of the employee bound by that agreement.
Leiza has litigated non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a non-compete agreement or theft of confidential information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
Lessons from the Mavericks Sexual Harassment Scandal: Specific Steps Your Company Can Take to Avoid a #MeToo Situation
On Wednesday, Mavericks released a 43-page report containing the results of a seven-month investigation into the allegations of a pervasive culture of sexual harassment that permeated the organization over the past 20 years. The allegations first came to light in an article published by Sports Illustrated in February of this year. The investigation report largely substantiates many of the facts described in the article and provides many recommendations for changes within the Mavericks organization.
If your company is worried about the #MeToo movement (hint, every company should be) and is attempting to make sure that it eliminates sexual harassment among its employees, the recommendations from the Mavericks’ investigation report provide a good road map for doing so.
Ask yourself, is your company doing the following:
- Increasing the number of women through the organization including in leadership and supervisory positions.
- Improving formal harassment reporting process and creating paths for victims to report misconduct
- Evaluating, and holding accountable, all executives, managers, and supervisors on their efforts to eliminate harassment and improve diversity of all kinds throughout the organization
- Conducting anonymous workplace culture and sexual harassment climate surveys on regular basis to understand the culture of the organization and whether problems exist
- Establishing clear hierarchies and lines of decision-making authority within the organization
- Strengthening and expanding Human Resources, and implementing clear protocols and processes for evaluating and adjudicating workplace misconduct issues. This should include providing clear communication to employees on the anti-harassment policy and how to report harassment.
- Providing “prompt and proportionate” and “consistent” discipline across the organization when harassment or misconduct has been substantiated.
- Providing regular training for all employees on sexual harassment (including bystander intervention training), and special training directed at managers and supervisors. Leaders across the Company should participate in the training and take an active leadership role in providing trust and safety in the workplace.
- Adopting clear, transparent, office-wide processes for hiring, on-boarding, promotions, lateral transfers, performance valuations, salary increases, and discipline within the organization. This should include centralizing key employment functions within the Human Resources department.
- Collecting and using data to add value to the company and to identify weaknesses.
- Requiring that all leaders, managers, and supervisors engage in efforts to improve workplace culture and to ensure a diverse inclusive workplace.
BOTTOM LINE: Eradicating sexual harassment in the workplace requires commitment from the upper echelons with the company, creation of clear anti-harassment policies, effective training, and consistent enforcement of such policies. If your company is committed to making a change, but not sure where to begin, the above recommendations provide a good starting check list for making such changes.
Leiza Dolghih represents companies in business and employment litigation. She also frequently advises companies on all aspects of employment law from hiring to firing to internal and government investigations. She can be reached at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or via the form below.
A Study Concludes Mentioning “Trade Secrets” in Form 10-K Leads to More Cyber Breaches
A recently-published study* concluded that companies that mention the existence of trade secrets in their publicly filed Form 10-K disclosures are 30% more likely to become victims of cyber attacks. Among those companies, the probability of a cyber attack is even higher for younger firms, firms with fewer employees, and firms operating in less concentrated industries.
Considering that trade secrets consist of all forms and types of “financial, business, scientific, technical, economic, or engineering information” and, along with other types of intellectual property, may constitute more than 80% of a company’s value, their theft can severely damage the company’s value or even bring its demise.
The study analyzed a total of 39,992 10-Ks from about 7,500 companies. Of those, 12,542 mentioned trade secrets, and 591 became victims of a cyber breach. The authors searched the companies’ Form 10-K disclosures for words such as “trade secrets” and “trade secrecy” and then analyzed the frequency of cyber breaches of such companies with those whose Form 10-K disclosures did not mention such words. Those who mentioned the key phrases often did so in the context of listing what types of intellectual property they had in their portfolio and what measures they were taking to protect their trade secrets.
According to the study, companies feel safe mentioning “trade secrets” in their public filings without revealing the nature of such trade secrets and, often, discuss the protection measures they take to protect this intellectual property, such as non-disclosure agreements with employees. However, according to the authors, even mentioning the existence of trade secrets increased the probability of a cyber attack by 30%.
BOTTOM LINE: Trade secrets only have value as long as they stay secret, so once they come into a competitor’s hands or become publicly available, their value is often destroyed. In light of the study, the companies may want to omit mentioning trade secrets in their public filings and press releases and reserve the discussion of their trade secrets protection measures for the confidential correspondence with their shareholders.
*The study was done by Michael Ettredge and Yijun Li of the University of Kansas School of Business, and Feng Guo of the Iowa State University College of Business.
Leiza co-chairs Trade Secrets and Non-Competes Disputes practice area at Lewis Brisbois Bisgaard & Smith LLP and represents companies in complex commercial and employment litigation. She can be contacted at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or by filling out the form below.
Employers Are Responsible for Stopping Sexual Harassment by Non-Employees
In the wake of the #MeToo movement, many employers remain unaware that they must investigate sexual harassment allegations and take appropriate measures if sexual harassment is perpetrated by non-employees, such as customers or vendors.
A recent opinion from the Fifth Circuit Court of Appeals addressed just this issue when the court considered whether a nurse at a nursing home facility who repeatedly complained of sexual harassment by a patient with dementia presented a strong enough claim to go to trial. The Fifth Circuit found that she did. And although Gardner v. CLC of Pascagoula, L.L.C. involved a rather common and pervasive problem of patient-nurse sexual harassment, the Court’s analysis is usefull for all companies where employees have interaction with customers or third parties on a regular basis.
The Court of Appeals reminded that pursuant to the Regulation issued by the Equal Employment Opportunity Commission (EEOC):
An employer may [] be responsible for the acts of non-employees, with respect to sexual harassment of employees in the workplace, where the employer (or its agents or supervisory employees) knows or should have known of the conduct and fails to take immediate and appropriate corrective action. In reviewing these cases the Commission will consider the extent of the employer’s control and any other legal responsibility which the employer may have with respect to the conduct of such non-employees. 29 C.F.R. 1604.11(e)
In Gardner, the patient who suffered from a host of mental disorders, had a documented history of grabbing the female nurses’ “breasts, butts, thighs, and trying to grab their private areas,” and asking them to engage in sexual activity with him as well as making lewd sexual comments. Several nurses routinely recorded this behavior on the patient’s chart and made complaints to their supervisors. Additionally, at least one of the supervisors observed the patient behaving in a sexually inappropriate manner.
When the plaintiff-nurse attempted to discuss her concerns about the patient’s behavior, her supervisor and the nursing facility administrators allegedly laughed and told her to “put [her] big girl patients on and go back to work.” Eventually, after the patient punched her in the breast while she was trying to assist him, she asked to be reassigned. Her request was denied. The patient was soon transferred to an all-male facility but only after he had punched a male resident.
The district court granted the employer’s summary judgment finding that a hostile work environment did not exist because it was “not clear to the court that the harassing comments and attempts to grope and hit [were] beyond what a person in the [nurse’s] position should [have] expect[ed] of patients in a nursing home.”
The Court of Appeals disagreed, however, ruling that while inappropriate comments from patients with reduced cognitive abilities may not rise to the level of legally-actionable sexual harassment, where a patient crosses the line into physical contact, which progresses from occasional inappropriate touching or minor slapping to persistent sexual harassment or violence with the risk of significant physical harm, the employer must take steps to try to protect an employee.
BOTTOM LINE: If a company becomes aware that its employees are being harassed by a third party, such a customer or vendor, the company has an obligation to take steps immediately to get the harassment to stop. This may include reassignment of the employee, adding security, conversations with a customer or a vendor, and a host of other measures. Ignoring the situation once the employer becomes aware of it may result in a liability under Title VII.
Leiza Dolghih represents companies in business and employment litigation. She also frequently advises companies on all aspects of employment law from hiring to firing to internal and government investigations. She can be reached at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or via the form below.
Is it a Crime to Take Employers’ Trade Secrets?
Few employees realize that when they take their employers’ trade secrets with them when leaving their jobs they may be exposing themselves to criminal liability under the Economic Espionage Act, which makes it a crime to steal trade secrets when: (1) the information relates to a product in interstate or foreign commerce (which is virtually any product now days) or (2) the intended beneficiary is a foreign power.
Of course, the overwhelming majority of employees do not take trade secrets for the purpose of selling the information to a foreign government; however, they can still be guilty of trade secrets theft if they were aware that the misappropriation would injure their employer, as the owner of trade secrets, to the benefit of someone else.
When is Trade Secrets Theft a Crime?
Under the Economic Espionage Act, a criminal defendant is guilty of trade secrets theft and can be fined and imprisoned for up to 10 years if:
- The defendant stole, or without authorization of the owner, obtained, destroyed or conveyed information;
- The defendant knew this information was proprietary;
- The information was in fact a trade secret;
- The defendant intended to convert the trade secret to the economic benefit of anyone other than the owner;
- The defendant knew or intended that the owner of the trade secret would be injured; and
- The trade secret was related to or was included in a product that was produced or placed in interstate or foreign commerce.
What is a “Trade Secret” Under the Statute?
The definition of a “trade secret” under the statute is very broad. It means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.
A recent indictment of six former and current Fitbit employees, who used to work for its rival Jawbone, demonstrates what conduct may result in criminal charges under the Economic Espionage Act. These six individuals were indicted on the grounds that they “knowingly received and possessed the Jawbone trade secrets, knowing them to have been stolen and appropriated, obtained, and converted without authorization, with the intent to convert the trade secrets to the economic benefit of someone other than Jawbone, and intending and knowing that the offense would injure Jawbone.”
Specifically, the indictment states that after these employees had resigned from Jawbone and signed certifications stating that they had returned all of Jawbone property, they continued to possess the following trade secrets – while working for Jawbone’s direct competitor – Fitbit:
- Chinese user market study of Chinese consumers and their motivation, influences, preferred brands, reasons for buying fitness trackers and shopping methodologies.
- Vendor and pricing list for international suppliers, compounded over time through trial and error, including competitive negotiated pricing and their specialized skills or equipment.
- Schematics, design specification and detailed description of unreleased products.
- Quantitative and qualitative studies of Jawbone users’ characteristics, reasons of using such trackers and a multitude of other factors useful in product development.
BOTTOM LINE: Companies should educate themselves and their employees on what types of information such companies consider to be their trade secrets and educate employees on what consequences they will face if they take that information to the competitors. If a trade secrets theft is detected, companies should assess whether the theft is serious enough to pursue criminal charges against the thief.
Leiza co-chairs Trade Secrets and Non-Competes Disputes practice area at Lewis Brisbois Bisgaard & Smith LLP and represents companies in complex commercial and employment litigation. She can be contacted at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or by filling out the form below.
The Fifth Circuit Rules Industry-Wide Noncompete Agreements Are Not Enforceable
The Fifth Circuit Court of Appeals recently considered whether a travel agency’s noncompete agreement with its employee was enforceable under Texas law. It concluded that because the agreement did not have geographic limits, was not limited to the travel agency’s customers with whom the employee actually worked during her employment, and included the entire travel agency industry, the noncompete was unenforceable.
In analyzing the noncompete clause, the court in Karen D’Onofrio v. Vacation Publications, Inc., provided a useful refresher as to what types of noncompete agreements are legal in Texas and what types are illegal and, therefore, not enforceable. The court confirmed that noncompete restraints that preclude employees from working in any capacity in a particular industry are not enforceable. Thus, when it comes to noncompete agreements, bigger is not always better.
What covenants not to compete are legal in Texas?
First of all, Texas law recognizes that reasonable covenants not to compete serve the legitimate business interest of preventing departing employees from “using the business contacts and rapport established” during their employment to take the employer’s clients with them when they leave.
Thus, a covenant not to compete is enforceable under Texas law if it is “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.” Tex. Bus. & Com. Code § 15.50(a).
In the case of personal services occupations, such as sales persons, the employer has the burden of showing the reasonableness of its noncompete agreement. Thus, for example, an employer who is asking a court to enforce a 20-mile covenant not to compete, will have to establish why the 20-mile – as opposed to a 10-mile – radius is reasonable.
What types of covenants not to compete are illegal in Texas?
As a general rule, under Texas law, covenants not to compete that extend to clients with whom the employee had no dealings during his or her employment or amount to industry-wide exclusions are overbroad and unreasonable and will not be enforced by the Texas courts. Similarly, the absence of a geographical restriction will generally render a covenant not to compete unreasonable and, therefore, unenforceable.
Was D’Onofrio’s covenant not to compete enforceable?
D’Onofrio’s noncompete agreement prohibited her — for a period of 18 months after her employment with the travel agency — from, among other things, working “in any capacity” for “any direct or indirect competitor of [the travel agency] in any job related to sales or marketing of cruises, escorted or independent tours, river cruises, safaris, or resort stays” or doing any business with “any person or entity” who had purchased a cruise or other travel product from the travel agency in the preceding 3 years.
According to the court of appeals, this covenant amounted to an industry-wide restriction, which prevented D’Onofrio from working in any job related to the sales or marketing of not just cruises, but also a host of other travel products—and was not limited as to either geography or clients with whom D’Onofrio actually worked during her employment. Therefore, the Fifth Circuit Court of Appeals concluded that D’Onofrio’s covenant not to compete with her travel agency was unreasonable as written.
When a Texas court finds a noncompete agreement unenforceable, what does that mean for the employer?
If a court determines that a covenant not to compete does not contain reasonable time, geography, and scope limitations, but is otherwise enforceable, then the court shall reform, i.e. rewrite, the noncompete agreement to make it reasonable. For example, a court can change a 50-mile radius in a non-compete agreement to a 20-mile radius or change an 18-month restriction to a 6-month restriction.
BOTTOM LINE: In the D’Onofrio case, the court of appeals sent the case back to the lower court directing it to rewrite the agreement. Texas employers should be aware that any time a court has to rewrite a noncompete because it is overbroad and unreasonable, there are negative consequences for the employer – more attorney’s fees, more time spent in litigation, and an inability to recover damages from the employee.
Therefore, it is important to make sure that noncompete agreements are written properly from the beginning rather than rely on the courts’ ability to rewrite them during litigation.
Leiza co-chairs Trade Secrets and Non-Competes practice area at Lewis Brisbois Bisgaard & Smith LLP and represents companies in complex commercial and employment litigation. She can be contacted at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or by filling out the form below.
2018 Mid-Year Non-Compete Laws Update
More and more states are amending their non-compete statutes to make them more employee-friendly. This trend, spurred by the White House report that highlighted the prevalence of non-compete agreements among low-skilled workers coupled with the revelation that some of the largest employers, like Jimmy John’s and Amazon, were requiring their sandwich-makers and warehouse employees to sign non-compete agreements, has continued into 2018.
Thus, on the heels of changes implemented in 2017 by California, Illinois and Nevada, which amended their non-compete laws to help protect employees’ right to change employers, in the first half of 2018, Utah, Idaho, and Colorado, enacted their own versions of employee-friendly laws.
UTAH – Now Restricts Use Of Non-Competes In Broadcasting Industry
In March 2018, Utah amended its non-compete statute to restrict the use of non-compete agreements in broadcast journalism. Specifically, employers may enforce non-compete agreements against employee in the broadcasting industry only if: (1) the employee receives a salary of at least $913 per week or $47,500 a year; (2) the non-compete clause is part of a written employment agreement with a term of less than four years; and (3) the employee was terminated “for cause” or he/she breached the employment agreement in a manner that resulted in his or her separation.
IDAHO – Has Modified Standard of Proof For Non-Compete Enforcement Actions
This March, Idaho repealed an 2-year old amendment to its non-compete law that was added back in 2016. The amendment created a rebuttable presumption of irreparable harm with respect to “key employees” and “key independent contractors,” thus putting the burden on these employees to prove that they had no ability to adversely affect the employer’s legitimate business interests as a result of their competitive employment.
The 2018 bill repealed this rebuttable presumption of irreparable harm. Therefore, Idaho has effectively placed the burden back on companies to establish a likelihood of irreparable harm before an injunction in a breach of non-compete case can be issued.
COLORADO – Now Prohibits Physician Non-Competes for Rare Disease Patients
Colorado generally allows non-compete agreements with physicians when certain conditions are met. The 2018 amendment to the non-compete statute added a paragraph to permit physicians to continue to treat patients with rare disorders without liability, even when providing such service would otherwise violate their non-compete agreements. Thus, the amendment protects physicians and their new employers from damages for providing care to patients with a rare disorder, as defined in accordance with the criteria developed by the National Organization For Rare Disorders, Inc., or any successor organization.
Many other states are considering amendments to their non-compete statutes and we are likely to see more changes in that area of the law in the second half of 2018. The days of one-size-fits-all non-compete agreements for multi-state employers are gone, and now companies need to make sure that their non-compete agreements are compliant in all the applicable jurisdictions.
Leiza co-chairs Trade Secrets and Non-Competes practice area at Lewis Brisbois Bisgaard & Smith LLP and represents companies in complex commercial and employment litigation. She can be contacted at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or by filling out the form below.
