Key Trade Secret and Non-Compete Developments in 2016
The Enactment of the Federal Defend Trade Secrets Act
The most significant development of 2016 was the enactment of the federal Defend Trade Secrets Act (“DTSA”). The DTSA creates a private, federal cause of action for trade secret misappropriation—regardless of the dollar value of the trade secrets. Because the DTSA’s remedies largely overlap with those already available under state law, it is a not a radical expansion of available remedies. However, both the provision for federal court jurisdiction and the forthcoming creation of a uniform body of federal law in this area are of great significance to employers. Additionally, the DTSA does have some unique provisions, including the authorization of ex parte seizure orders in extreme circumstances and protections for whistleblowers who disclose trade secrets under certain circumstances (e.g., in confidence to a government official or an attorney solely for the purpose of reporting or investigating a suspected violation of law, or in a complaint filed under seal). The DTSA also mandates notice about such whistleblower protections in new or updated employment agreements that govern the use of trade secrets or other confidential information.
Political Winds Blow Against Non-Competes
A March 2016 report from the U.S. Department of the Treasury found that non-compete agreements harm worker welfare and job mobility. Similarly, a May 2016 White House report questioned whether non-competes for low-wage workers protect legitimate business interests or merely hamper labor mobility. And in October 2016, the White House issued a “Call to Action,” asking states to ban non-compete clauses for certain categories of workers, improve transparency and fairness of non-compete agreements, and incentivize employers to draft enforceable non-compete agreements, rather than overbroad agreements that may have a chilling effect on employee mobility.
The Attorneys General of at least two states (Illinois and New York) have heard “this call to action.” In the summer of 2016, New York Attorney General Eric T. Schneiderman announced that his office had reached agreements with a number of companies to curtail their use of non-competition agreements with respect to non-executive and low-wage employees. Similarly, Illinois Attorney General Lisa Madigan has publicly signaled that scrutiny of such agreements will be a high priority for her office in 2017.
New State Non-Compete Statutes
On the state level, several states enacted laws regarding non-competes:
Consistent with the White House “Call to Action,” Illinois passed the Illinois Freedom to Work Act, which bars non-compete agreements for workers who earn the greater of (i) the federal, state, or local minimum wage or (ii) $13.00 an hour.
Utah enacted a law limiting restrictive covenants entered into on or after May 10, 2016, to a one-year time period from termination, subject to certain limitations.
Connecticut and Rhode Island enacted laws restricting physician non-competes.
Alabama codified a “middle of the road” approach, allowing two-year non-compete and 18-month non-solicitation clauses for employees, provided that they are limited to the geographic area where the company operates a similar business.
Additional legislation regulating non-compete agreements is anticipated in 2017—especially with respect to lower-level employees.
California Closes a Restrictive Covenant Loophole
California is particularly hostile to post-employment restrictions and has a statutory ban against most restrictive covenants. California courts generally refuse to honor choice-of-law provisions in non-compete agreements if the designated law permits enforcement of a post-employment restriction. However, employers did have one tool to help them enforce restrictive covenants against employees who reside in California: they could include a mandatory choice-of-forum provision designating a forum state that is friendlier to restrictive covenants.
Traditionally, the trend in California has been to close that loophole by rejecting non-California forum selection provisions. Indeed, in 2015, a California court held that a forum selection provision is not enforceable if it would deprive an employee of a non-waivable statutory right. This year, California further narrowed that loophole when legislators enacted California Labor Code Section 925 (signed into law on September 25). Section 925 provides that an employer cannot require employees, as a condition of employment, to agree to a provision that requires them to adjudicate a dispute outside California or deprives them of the substantive protection of California law. This law does not apply, however, to employees represented by counsel. While there is likely to be litigation on this topic as employers may still seek to file suit in other states, it appears that the door is closing on an employer’s ability to enforce restrictive covenants against California employees.
What Employers Should Do Now
In light of the enactment of the DTSA, employers should ensure that any new or updated agreements with employees that govern the use of trade secrets or confidential information provide notice regarding whistleblowing activities, in accordance with the terms of the DTSA. Further, employers (especially in those states that codified non-compete laws in 2016) should review their agreements that contain restrictive covenants to make sure that they would withstand judicial scrutiny, and, if they will not, revise them so that they are narrowly tailored to a reasonably protectable interest. Finally, with narrow exceptions, employers in California going forward must not require employees to agree to adjudicate disputes outside California or otherwise deprive them of California law.