Non-Competes, Unfair Competition and Trade Secrets

When:  Thursday, September 14, 2017    8:00 a.m. – 4:30 p.m.

Where:  New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Immigration
  • Global Executive Compensation
  • Artificial Intelligence
  • Internal Cyber Threats
  • Pay Equity
  • People Analytics in Hiring
  • Gig Economy
  • Wage and Hour
  • Paid and Unpaid Leave
  • Trade Secret Misappropriation
  • Ethics

We will start the day with two morning Plenary Sessions. The first session is kicked off with Philip A. Miscimarra, Chairman of the National Labor Relations Board (NLRB).

We are thrilled to welcome back speakers from the U.S. Chamber of Commerce.  Marc Freedman and Katie Mahoney will speak on the latest policy developments in Washington, D.C., that impact employers nationwide during the second plenary session.

Morning and afternoon breakout workshop sessions are being led by attorneys at Epstein Becker Green – including some contributors to this blog! Commissioner of the Equal Employment Opportunity Commission, Chai R. Feldblum, will be making remarks in the afternoon before attendees break into their afternoon workshops. We are also looking forward to hearing from our keynote speaker, Bret Baier, Chief Political Anchor of FOX News Channel and Anchor of Special Report with Bret Baier

View the full briefing agenda and workshop descriptions here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions.  Seating is limited.

The new episode of Employment Law This Week offers a year-end roundup of the biggest employment, workforce, and management issues in 2016:

  • Impact of the Defend Trade Secrets Act
  • States Called to Ban Non-Compete Agreements
  • Paid Sick Leave Laws Expand
  • Transgender Employment Law
  • Uncertainty Over the DOL’s Overtime Rule and Salary Thresholds
  • NLRB Addresses Joint Employment
  • NLRB Rules on Union Organizing

Watch the episode below and read EBG’s Take 5 newsletter, “Top Five Employment, Labor & Workforce Management Issues of 2016.”

Our colleague Peter A. Steinmeyer, a Member of the Firm at Epstein Becker Green, has a post on the Trade Secrets & Noncompete Blog that will be of interest to many of our readers in the financial services industry: “Employer’s Waiver Of Non-Compete Period In Order To Avoid $1 Million Payment Held Ineffective.

Following is an excerpt:

In Reed v. Getco, LLC, the Illinois Court of Appeals was recently faced with an interesting situation: under a contractual non-compete agreement, the employer was obligated to pay the employee $1 million during a six month, post-employment non-competition period.  This was, in effect, a form of paid “garden leave” —  where the employee was to be paid $1 million to sit out for six months – perhaps to finally correct his golf slice or even learn the fine art of surfing.  It was a win-win situation that seemingly would be blessed by most courts; it was for a reasonable length of time, and the employee was set to be paid very handsomely for sitting out.  Accordingly, it is doubtful that most judges would have had an issue with it.

Yet here, the employer apparently had second thoughts – and just over a week after the employee resigned, the employer notified the employee that it was waiving the six month non-compete, allowing him to work anywhere, and therefore not paying him any portion of the promised $1 million. …

One option to control such costs is to make explicit in the agreement that the employer has the right to shorten any non-compete or garden leave period, and that the employer also has an accompanying right to proportionately reduce or eliminate any accompanying payment obligation. The absence of such an express contractual authorization was the death knell for Getco in this case.

Read the full post here.

Employers Under the Microscope: Is Change on the Horizon?

When:  Tuesday, October 18, 2016    8:00 a.m. – 4:00 p.m.

Where:  New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Latest Developments from the NLRB
  • Attracting and Retaining a Diverse Workforce
  • ADA Website Compliance
  • Trade Secrets and Non-Competes
  • Managing and Administering Leave Policies
  • New Overtime Rules
  • Workplace Violence and Active-Shooter Situations
  • Recordings in the Workplace
  • Instilling Corporate Ethics

This year, we welcome Marc Freedman and Jim Plunkett from the U.S. Chamber of Commerce.  Marc and Jim will speak at the first plenary session on the latest developments in Washington, D.C., that impact employers nationwide.

We are also excited to have Dr. David Weil, Administrator of the U.S. Department of Labor’s Wage and Hour Division, serve as the guest speaker at the second plenary session. David will discuss the areas on which the Wage and Hour Division is focusing, including the new overtime rules.

In addition to workshop sessions led by attorneys at Epstein Becker Green – including some contributors to this blog! – we are also looking forward to hearing from our keynote speaker, Former New York City Police Commissioner William J. Bratton.

View the full briefing agenda here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions.  Seating is limited.

Our colleague Peter L. Altieri, a Member of the Firm at Epstein Becker Green, has a post on the Trade Secrets & Noncompete Blog that will be of interest to many of our readers in the financial services industry: “Non-Solicit Violation: $4.5 Million Punitive Damage Award Upheld.”

Following is an excerpt:

Rarely do we see punitive damages being awarded in cases involving the movement of employees and information between firms. The Superior Court of Pennsylvania last week affirmed a punitive damage award granted by a Judge of the Court of Common Pleas in such a matter, albeit which also found tort liability against the new employer and the five former employees.

The decision in B.G. Balmer & Co., Inc. v. Frank Crystal & Co. Inc., et al. sets forth a classic example of “bad leavers” and a complicit new employer. Confidential information concerning clients was copied and given to the new employer.  The senior employees, on Company time and using Company facilities, conspired with the new employer to hire the junior employees and solicit existing clients, including the largest and best clients of the Company.  Complete indemnification was provided by the new employer to the employees.  Personnel files were purloined and not returned upon request.  Upon resignation they immediately solicited the company’s largest client and did so using trade secret and confidential information of the Company while disparaging the Company in the process. …

The conduct of the defendants in Balmer provides a roadmap on how not to recruit employees from a competitor and the resulting punitive damages award should be a further deterrent to all bad leavers and their new employers.

Read the full post here.

Employers seeking to protect their competitive advantage and find an alternative method of influencing employees to not compete are increasingly relying on so-called “forfeiture for competition” agreements in place of traditional non-competes. This trend is driven, in large part, by the “employee choice” doctrine. In states that have adopted the employee choice doctrine, such as New York, a post-employment non-compete will not be subject to the usual reasonableness standard when it is contingent upon an employee’s choice between receiving and retaining a benefit (e.g., restricted stock, stock options, or some other deferred compensation) and competing.

The validity of the employee choice doctrine was recently affirmed by a New York State court applying Delaware law. See NBTY, Inc. v. O’Connell Vigliante, 2015 N.Y. Slip Op 4 51726(U) (Sup. Ct., Suffolk County, Nov. 24, 2015). The court’s decision in NBTY serves as an important reminder for employers that certain key components of the employee choice doctrine must be present to enforce post-employment non-competes.

NBTY involved a global manufacturer, distributor, and retailer of vitamins and nutritional supplements that sought to preclude three former executives from joining a direct competitor, Piping Rock Health Products, by invoking restrictive covenants contained in stock-option agreements that they had signed in 2011. The stock-option agreements provided the executives options to purchase specific numbers of shares of common stock that would vest over time, subject to certain terms and conditions. The agreements contained restrictive covenants prohibiting the executives from engaging in any competing business in North America, Europe, or China for a period of one year following the end of their employment with NBTY. After the executives resigned in 2014 and 2015 and began employment with Piping Rock, NBTY commenced an action in New York State court to enforce their restrictive covenants.

In its decision, the Supreme Court, Suffolk County, Commercial Division, acknowledged the applicability of the employee choice doctrine under New York law. Citing Lenel Systems Int’l, Inc. v. Smith, 106 A.D.3d 1536, 966 N.Y.S.2d 618 (N.Y. App. Div., 4th Dep’t 2013), and Morris v. Schroder Capital Management Int’l, 7 N.Y.3d 616, 825 N.Y.S.2d 697 (2006), the court explained that the individual defendants had agreed to post-termination non-compete provisions in exchange for the receipt of additional incentive compensation, i.e., stock options. Upon their decision to leave NBTY’s employ, they had the choice of preserving their rights under the stock-option agreements by refraining from competition with NBTY or risking forfeiture of such rights by exercising their right to compete. The court held that the restrictive covenants contained in the stock agreements were unenforceable, but by choosing to compete with NBTY, the individual defendants forfeited their right to the stock options.

As straightforward as the employee doctrine is in theory, in practice, employers seeking to avail themselves of the doctrine should evaluate and craft their agreements to ensure that all key components are present:

A Genuine Choice. An employee must have a genuine choice between retaining the benefits or leaving the employer to engage in competitive activities. If an employee makes the informed decision to compete,  the employer may require that he or she forfeit the benefits promised in exchange for the non-compete.

Voluntary Separation. Some courts have interpreted the “genuine choice” requirement to mean that the employee must voluntarily separate from the employer in order for the employee choice doctrine to apply. The reasoning behind this interpretation is that if the employee is terminated, the employer, not the employee, has made the choice to end the relationship. Thus, a court may not be willing to apply the employee choice doctrine to an employee who is terminated without cause or an employee who is “constructively discharged.” If the employee choice doctrine is not applied, any non-compete that the employer seeks to enforce may be subject to the usual reasonableness analysis that would generally be considered by a court analyzing whether to enforce a restrictive covenant.

Consideration. For the employee choice doctrine to apply, consideration is a necessary element. States vary as to whether initial employment or continued employment, standing alone, may serve as sufficient  consideration. When a restrictive covenant is entered into after employment begins, new consideration may be required (and, in any event, may be helpful), such as a corresponding benefit or beneficial change in employment status. Even in the context of stock option plans, restricted cash, or other monetary benefits, consideration may still be a concern when restrictive covenants are added to preexisting plans or benefits.

Forfeiture Relief. The employee choice doctrine is about forfeiture, not restriction. In other words, the agreement should not put a blanket restriction on postemployment competition, but rather should  memorialize an incentive-driven bargain: the employee’s receipt and retention of certain benefits in exchange for his or her avoidance of post-employment competitive activity. Inclusion of language that seeks to enjoin the employee from engaging in competition undermines the “choice” element of the employee choice doctrine. Generally speaking, forfeiture of benefits (possibly through rescission), not an injunction, is the sought-after remedy. Of course, an employer would not necessarily be prevented from seeking injunctive relief, where appropriate.

State-Specific Standards. Not all states have adopted the employee choice doctrine. Courts in North Dakota, for example, have found forfeiture for competition clauses to be per se unenforceable. Connecticut, Maryland, Massachusetts, and Pennsylvania recognize the concepts of employee choice and forfeiture-for-competition, but apply them in conjunction with a traditional reasonableness analysis. In light of this wide variation, employers should take into consideration the specific state in which they seek to enforce post-employment non-competes when crafting such agreements.

A version of this article originally appeared in the Take 5 newsletter “Five Employment Law Compliance Topics of Interest to Financial Services Industry Employers.”

Our colleague Peter A. Steinmeyer—co-leader of our Non-Competes, Unfair Competition, and Trade Secrets service team at Epstein Becker Green—has a Trade Secrets & Noncompete Blog post that will be of interest to many of our readers: “Ambiguous Allegations, Lack of Imminent Harm, and a Delay in Taking Action Doom Request for a Temporary Restraining Order.”

Following is an excerpt:

In Bridgeview Bank Group v. Meyer, the Illinois Appellate Court recently affirmed the denial of a temporary restraining order (“TRO”) against an individual who joined a competitor and then, among other things, allegedly violated contractual non-solicitation and confidentiality obligations. …

Practitioners can take several lessons from this case.  First, when it comes to requests for injunctive relief, time is of the essence.  Second, when drafting a complaint, even though a plaintiff must take care not to unwittingly publish trade secrets or other confidential information, enough detail must be provided to establish the necessary elements for injunctive relief.  Finally, to justify the powerful remedy of an injunction, the requesting party must be able to demonstrate imminent harm, and its claims must be supported by competent evidence.

Read the full post here.

My colleague Peter Steinmeyer published a post on the Trade Secrets and Noncompete Blog that will be of interest to many of our readers: “Chicago District Judge Issues Primer On Declaratory Judgment Actions Regarding The Enforceability Of Non-Compete Agreements.”

Following is an excerpt:

Last week, Chicago district judge Charles Kocoras dismissed a declaratory judgment action challenging the enforceability of a facially broad form non-compete agreement signed by all employees of the Jimmy John’s sandwich chain.  Judge Kocoras held that the dispute was not judiciable because the plaintiffs lacked the requisite “reasonable apprehension” of litigation against them and because they failed to allege that they had actually engaged in conduct that would violate the non-compete.  (Judge Kocoras’ memorandum opinion also addressed significant joint employer, franchisor/franchisee, and FLSA issues which are beyond the scope of this blog.)

As an initial matter, Judge Kocoras noted that “[t]he Seventh Circuit has not addressed whether a claim for declaratory relief is judiciable in the context of non-compete provisions.”  Nevertheless, borrowing from an analogous Seventh Circuit decision involving a patent infringement/declaratory judgment action, Judge Kocoras held that in order to establish the existence of an actual case or controversy sufficient to support a claim for declaratory relief in the non-compete context, the plaintiffs must clear two threshold procedural hurdles.  “First, the Plaintiffs must have a ‘reasonable apprehension’ that the Defendants are going to file a lawsuit against them for violating the Non-Competition Agreement. Second, the Plaintiffs must allege that they were preparing to engage or had engaged in conduct that would compete with the Defendants.”

Read the full blog post here.

Prosecutions of employees taking proprietary software with them when they leave financial services firms is on an upswing.

Our colleagues Peter Altieri and James Flynn at Epstein Becker Green address this in their post “Leave the Source Code Behind,” on the Trade Secrets & Noncompete Blog.

Following is an excerpt:

U.S. Attorneys in many jurisdictions are more willingly stepping into the fray between financial services firms and their former employees who have misappropriated trade secret information. In a recently reported case out of the Northern District of Illinois, two former employees of Citadel LLC, a Chicago based premier hedge fund in the high frequency trading space, pled guilty and received three-year sentences for their participation in a scheme to steal source code from Citadel and a prior employer in order to create their own trading strategy for their personal future use. This continues a trend begun in earnest in 2013 after the Department of Justice issued the Administration’s Strategy On Mitigating The Theft Of U.S. Trade Secrets. Since that time, federal criminal enforcement efforts in trade secret matters have been on the upswing in the financial services industry as well as other areas.

 Read the full post here.

Our colleague Lauri Rasnick, a Member of the Firm at Epstein Becker Green, wrote a Law360 article titled “Drafting Customer Nonsolicitation Provisions in NY.” (Read the full version – subscription required.)

Following is an excerpt:

A recent New York Appellate Division First Department decision, TBA Global LLC v. Proscenium Events LLC, et al., Index Nos. 10948, 651171/12, (1st Dept Feb. 5, 2014), may not answer all questions about drafting enforceable nonsolicitation provisions, but it does shed some light on the current state of New York law.

The Lower Court Decision

The case was brought by TBA Global LLC, a live events marketing company that arranges and produces live event programs and marketing presentations for companies and products, against three former employees and their new company. Each of the former employees was subject to a nonsolicitation contract. After they simultaneously resigned, the three former employees all began to immediately compete with TBA.

TBA’s complaint alleged that the former employees improperly set up the competing business while employed at TBA, and that they violated their restrictive covenants through their activities. On summary judgment, the trial court only considered the latter claim — whether the restrictive covenants at issue were enforceable as a matter of law.