Ohio Decision Highlights Importance of Business Protection Agreements with Independent Contractors

Just as the distinction between an individual’s status as independent contractor versus employee can have serious ramifications for wage, tax, and other legal issues, the same can be true for claims relating to unfair competition. As a recent decision from the Court of Appeals of Ohio highlights, employers must be especially diligent protecting against unfair competition when engaging independent contractors to carry out their business.

Factual Background

In Key Realty, LTD. v. Hall, 2021-Ohio-1868, plaintiff Key Realty engaged defendant Michael Hall as an independent contractor to manage some of the firm’s real estate brokers. By the time he left in 2019, Hall had multiple managers and brokers reporting to him, who supervised about 380 real estate agents.

In 2012, Key Realty had Hall sign a Non-Competition, Non-Solicitation, and Confidentiality Agreement (“Agreement”). The Agreement stated the parties made it “in consideration of the mutual promises contained herein, and for other good and valuable consideration, including ________.” Yet the parties never filled in the blank space.

Before departing Key Realty, Hall formed a new real estate brokerage named Red 1. When he left, Hall shut Key Realty out of the Facebook group he used to communicate with Key Realty’s agents. He also terminated Key Realty’s access to the Google drive and email accounts he used while working for Key Realty, “blocking access to any documents that he created while performing work for Key Realty.” Key Realty presented evidence that it lost around 200 agents in the Columbus area after Hall’s departure.

Ownership of Social Media Accounts and Digital Property

Hall claimed that because he was an independent contractor operating through a separately owned LLC, the Facebook account, Google drive, and email accounts he used while in service of Key Realty belonged to him. The trial court granted summary judgment to the defendants on Key Realty’s claims for conversion and unauthorized use of computer property. Although at first affirmed on appeal, the appellate court later reversed upon Key Realty’s motion for reconsideration.

On reconsideration, the appellate court determined that the language of the Agreement created a genuine issue of material fact over ownership, because it specified that “all books, records, files, forms, reports, accounts and documents relating in any manner to [Key Realty’s] business or customers,” were the exclusive property of Key Realty.

While Hall may prevail on this issue at trial, there is no doubt the language of the Agreement is critical for Key Realty. Had Key Realty failed to enter into the Agreement with Hall, or to include this property ownership provision, its defenses to Hall’s claim of ownership over the valuable digital accounts and property Hall developed while engaged by Key Realty would have been significantly weakened. Hall may not have been able to claim ownership had he been an employee, rather than an independent contractor, making the Agreement even more important for Key Realty.

Consideration for the Agreement

The initial appellate court found the Agreement unenforceable because the parties left a line blank where they should have listed the consideration. The court also reasoned that, while continued employment can constitute consideration for restrictive covenants, continued status as an independent contractor could not.

On reconsideration, the appellate court found that Hall’s continued engagement with no specific end-date created something equivalent to “employment-at-will,” even though the relationship was employer-independent contractor. Because the parties continued their at-will relationship for six years after executing the Agreement, this served as sufficient consideration.

The blank space where the parties should have identified the consideration did not alter this result, because the Agreement elsewhere stated that, in exchange for the restrictive covenants, Hall would “gain valuable information and insights on the lines of business in which [Key Realty] is engaged; access to [Key Realty’s] confidential and proprietary information; and exposure to its existing and potential business opportunities.” This, according to the appellate court on reconsideration, was a “bargained-for benefit and detriment, fully satisfying the general definition of consideration in Ohio.”

Conclusion

Although the Key Realty court ultimately reversed summary judgment for the defendants on reconsideration, Key Realty must still grapple with these issues on its way to trial. This case serves as an excellent reminder for employers to think carefully about the distinction between independent contractors and employees when seeking to protect their business interests. A well-written, clear contract is the best way to confirm whether the employer or independent contractor owns the work product generated during the engagement. As always, parties to restrictive covenants and other agreements should make any variables in a contract (such as consideration) explicit before signing. Continued engagement of an independent contractor, standing alone, likely would not constitute sufficient consideration in all jurisdictions.

Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to assist with any questions.

Jackson Lewis Law Clerk Jackson Biesecker contributed to this post. 

New Nevada Law Further Regulates Restrictive Covenants

Important amendments to Nevada’s non-compete statute, NRS 613.195, recently were enacted when Nevada Governor Steve Sisolak signed into law Assembly Bill 47. Because A.B. 47 does not have a specified effective date, it will go into effect on October 1, 2021, pursuant to Nevada law.

Ban on Non-Competes for Hourly Employees

First, A.B. 47 bans non-compete covenants for employees who are “paid solely on an hourly wage basis, exclusive of any tips or gratuities.” The law does not appear to affect covenants for hourly employees who also receive bonuses, profit sharing, or commissions from the employer.

If the employer or employee files a lawsuit to enforce or challenge the non-compete covenant and the court finds the covenant is unlawful because it “applies to [an employee paid solely on an hourly wage basis],” the court is required to award the employee their reasonable attorneys’ fees and costs.

Ban on Actions to Enforce or Impose Certain Customer Servicing Restrictions

NRS 613.195 already prohibited covenants that restricted a former employee from providing services to a former customer or client if: (a) “the former employee did not solicit the former customer or client”; (b) “the customer or client voluntarily chose to leave and seek services from the former employee”; and (c) “the former employee is otherwise complying with the limitations in the [non-compete] covenant as to time, geographical area and scope of activity to be restrained[.]”

The new law now makes clear that an employer may not bring an action seeking to restrict any of these activities, even if the agreement itself does not explicitly do so.

If the employer or employee files a lawsuit regarding the former employee’s covenants and the court finds the employer has wrongfully restricted or attempted to restrict the former employee from providing services to customers or clients in the manner described above, the court is once again required to award the employee their reasonable attorneys’ fees and costs.

“Blue Pencil” In Employee-Initiated Challenges

NRS 608.195 previously required Nevada judges to revise, or “blue pencil,” unreasonable non-compete agreements. If the agreement was supported by valuable consideration but was unreasonable as to time, geography, or activity restricted, the judge was required to revise the agreement such that its restraint was no greater than necessary for the protection of the employer. However, such judicial revision was only required in actions brought by employers to enforce such agreements. In actions brought by employees to invalidate non-compete agreements, judges were not required to engage in the “blue pencil” process.

The new law extends the required judicial reformation process to actions brought by employees challenging non-compete covenants. This is one change to the law that is beneficial to employers.

The exact parameters of Nevada’s new requirements for restrictive covenant agreements will be fleshed out through future litigation and court decisions, which Jackson Lewis will monitor. Nonetheless, the significance of these amendments requires employers to give careful consideration in the drafting of non-compete covenants at the outset. Further, while A.B. 47 does not state whether its provisions are applicable retroactively to agreements that already have been executed, all employers should review their existing non-compete agreements with the new law in mind.

Please contact your Jackson Lewis attorney to discuss these developments and your specific organizational needs.

 

Illinois Passes Bill to Further Limit Restrictive Covenants for Employees

After extensive negotiations between interest groups representing both employees and businesses, the Illinois General Assembly passed a major bill on May 31, 2021, that further limits and clarifies the circumstances in which restrictive covenants can be enforced against Illinois employees. Illinois Governor J. B. Pritzker is expected to sign the bill into law.

We provide a detailed analysis of the new law and its impact for Illinois employers in our article here. The new law goes into effect January 1, 2022, and applies to agreements entered on or after that date.

At a high level, the new law imposes several major changes:

  1. Non-competes will be invalid for employees earning less than $75,000 per year, with the minimum increasing over time.
  2. Non-solicitation covenants (defined to include non-solicitation of employees and actual or prospective customers, vendors, and suppliers) will be invalid for employees earning less than $45,000 per year, with the minimum increasing over time. This is significant. Other states that recently regulated restrictive covenants generally did not expressly affect non-solicitation provisions.
  3. Non-competes and non-solicitation covenants will be void for employees furloughed or terminated due to business circumstances or governmental orders related to COVID-19 or similar circumstances, with a limited exception for non-competes enforced through payment of base salary in the enforcement period.
  4. Non-competes (but not non-solicitation covenants) will be prohibited for employees covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act or individuals employed in construction, subject to limited exceptions.
  5. The well-known Fifield standard under Illinois law is now codified in the law.
  6. Employees must be advised in writing to seek attorney consultation and provided at least 14 calendar days to review a restrictive covenant before signing.
  7. The Illinois attorney general will have the right to initiate investigations and initiate or intervene in a civil action to compel compliance. The attorney general may request a court to impose civil penalties not to exceed $5,000 for each violation, or $10,000 for each repeat violation within a 5-year period.

In short, this is a major overhaul of restrictive covenant law in one of the nation’s most heavily populated states. We will continue to analyze these issues and explore their practical impact for employers.

“So” What? SCOTUS Adopts Narrow Interpretation of CFAA

It’s not every day the U.S. Supreme Court issues an opinion relevant to this blog, so we are understandably excited when it does.

In a landmark decision, the Court has ruled that the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030 et seq., does not prohibit improper use of computer information that an individual was authorized to access. Rather, the law prohibits obtaining information from areas of a computer, such as files, folders, or databases, that are outside the limits of the individual’s authorized access. Van Buren v. United States, No. 19-783 (June 3, 2021).

The Court reached its conclusion through an exercise in statutory construction fit for a law school exam, dissecting competing interpretations of the word “so.” You can read more about the Court’s interpretive analysis and the implications for employers in our article here.

The upshot is that this decision will have a significant impact on “departing employee” cases. Improper use of information that an employee was authorized to access (a common fact pattern) will not trigger CFAA liability, removing one pathway into federal court. Without the CFAA’s protection for such conduct, employers have even greater reason to protect their information from misuse through enforceable contracts and thoughtful security protocols, among other methods. And although no longer in violation of the CFAA, improper acquisition or use of information to which an employee has authorized access may still trigger liability under a host of other laws, including the federal Defend Trade Secrets Act.

Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group and the Privacy, Data and Cybersecurity practice group are available to assist employers in protecting their assets from improper acquisition and use. We will continue to monitor the aftereffects of Van Buren in the lower courts.

North Carolina Court Upholds 10-Year Restrictive Covenant Between Employer and Former Employee

When one thinks of a “reasonable” temporal scope for a restrictive covenant between employer and employee, usually that period is measured in months or years, not decades. But as a recent North Carolina decision reminds us, context is everything, and a 10-year restriction can be enforceable in the right circumstances.

In KNC Techs., LLC v. Tutton, 2021 NCBC LEXIS 38 (N.C. Super. Ct. Apr. 8, 2021), Eric Tutton (“Tutton”) entered into a Non-Compete Agreement during his employment with KNC Technologies, LLC (“KNC”). Around his resignation from KNC in 2013, Tutton allegedly violated the Non-Compete Agreement and misappropriated KNC’s confidential information, leading KNC to sue Tutton (“Tutton I”).

KNC and Tutton entered into a negotiated Settlement Agreement resolving Tutton I that prohibited Tutton from “solicit[ing], contact[ing], and/or mak[ing] sales” for 10 years to “[KNC] customers” and nine specifically named KNC suppliers. The trial court approved and entered a consent order reflecting the terms of the Settlement Agreement, thus ending the lawsuit.

Roughly a year after entry of the Settlement Agreement and consent order, Tutton allegedly formed a competing company and later violated the restrictive covenants in the Settlement Agreement. KNC sued Tutton again, this time in the North Carolina Business Court[1] (“Tutton II”), and Tutton challenged the Settlement Agreement as being unreasonable and unenforceable under the well-developed North Carolina case law on restrictive covenants between employers and employees. Indeed, North Carolina courts usually view five years as the outer limit of enforceable restrictive covenants between employer and employee, and even that period is enforceable only in “extreme conditions.” Hartman v. W.H. Odell & Assocs., 117 N.C. App. 307, 315, 450 S.E.2d 912, 918 (1994).

The Business Court rejected Tutton’s challenge and denied his early motion to dismiss KNC’s claim for breach of the Settlement Agreement. See KNC Techs., LLC v. Tutton, 2019 NCBC LEXIS 72 (N.C. Super. Ct. Oct. 9, 2019). Even though KNC and Tutton did have an employment relationship at one point, the Court declined to analyze the Settlement Agreement as a restrictive covenant between employer and employee. The Court noted there are other contexts in which restrictive covenants are routinely upheld (such as with the sale of a business, or between franchisors and franchisees), and the facts alleged “did not fit squarely under the analysis applied to restrictive covenants between employer and employee or buyer and seller, but instead call for a more situation-specific approach.” Id. at ¶ 29.

Under this “situation-specific approach,” the Court concluded the 10-year restriction in the Settlement Agreement was reasonable and enforceable. The facts supporting the Court’s conclusion were: (1) Tutton admittedly violated the original Non-Compete Agreement; (2) Tutton, while represented by counsel, settled Tutton I by freely agreeing to less onerous restrictions than a true covenant not to compete; and (3) the Settlement Agreement did “nothing more than protect KNC’s business interests, which Tutton [had] already demonstrated a propensity to ignore.” Id. at ¶ 31.

On April 8, 2021, on summary judgment after the parties conducted discovery, the Court continued to hold enforceable the 10-year restriction, at least for KNC’s suppliers. Tutton II, 2021 NCBC LEXIS 38, at ¶¶ 56-62. Although the 10-year supplier restriction was held enforceable, the language imposing the restriction itself was deemed ambiguous, and trial will be necessary to establish potential breach. Id. at ¶¶ 63-66. The Court did grant summary judgment to Tutton on the customer-focused restriction, because it prohibited Tutton from contacting too broad a universe of individuals and entities. Notably, the Court reiterated that the 10-year temporal scope of the customer restriction was reasonable under the specific facts before it. Id. at ¶ 47.

This case raises important considerations for employers when negotiating restrictive covenants outside the traditional employment context. Particularly where the employee is represented by counsel and the parties are negotiating settlement, courts may be more willing to enforce broader restrictions. This is also an important reminder that, even in the age of increased regulation and scrutiny, lengthy restrictive covenants may still be enforced.

Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to advise on these strategic considerations.

[1] The North Carolina Business Court is a special forum of the state trial division that only hears cases involving complex business disputes.

 

 

Two New Connecticut Bills Aim to Prohibit Physician Non-Competition Agreements

Connecticut lawmakers recently introduced two bills that seek to ban non-competition agreements for physicians. If implemented, this would be the second time in five years that Connecticut has legislated in the area of physician restrictive covenants.

In mid-2016, Connecticut enacted legislation that implemented a maximum one-year temporal limitation on physician non-competition agreements, as well as a geographic limitation of no greater than fifteen miles from the primary site where such physician practices. The law also set requirements as to how physician non-competes were to be executed, and restricted employers from enforcing such agreements when terminating physicians’ employment without cause and/or without offering to renew the physicians’ prior contract on the same or similar terms and conditions.

The two new bills, Senate Bill 99 and House Bill 5572, introduced on January 12 and January 24, 2021, respectively, propose to ban completely the use of non-compete clauses in physician contracts. Both bills have been referred to the Connecticut Legislature’s Joint Committee on Public Health. The specific details concerning the proposed restrictions have yet to be publicized, but Connecticut healthcare industry employers should continue to monitor developments in this area closely.

Nationwide, Connecticut appears to account for a disproportionate percentage of the proposed legislation in the area of restrictive covenant regulation in 2021. For example, three separate bills—Senate Bill 906, House Bill 6285, and House Bill 6379—each provide a complete overhaul of restrictive covenant law in Connecticut, in similar fashion (with some notable distinctions) to the proposal currently before the New Jersey General Assembly. In the area of home health care, competing bills have been introduced to either modify or eliminate existing limitations on various types of restrictive covenants in that industry.

Jackson Lewis attorneys are available to answer inquiries from employers concerning these and other proposed changes. We will continue to monitor developments in this area. Readers can subscribe to this blog to stay up to date on pending legislation and other updates as they arise.

New Jersey General Assembly to Vote on Renewed Bill Seeking to Curb Restrictive Covenants

New Jersey may be next up to join the growing number of states that significantly restrict the use of non-competition agreements in employment.  As we discussed back in December 2017, a bill proposed in New Jersey at the time, Senate Bill 3518, would “impose significant restrictions and limitations” on the use of restrictive covenants in the employment context.   Ultimately, SB 3518 died in committee, but a revival is underway.

On February 24, 2021, a renewed bill seeking to curb restrictive covenants, Assembly Bill 1650, passed through committee on a 6-3 vote, and is now heading to a full vote by the General Assembly.

The new bill is nearly identical to its 2017 predecessor.  Both aim to regulate the use of “restrictive covenants,” defined as “an agreement between an employer and an employee arising out of an existing or anticipated employment relationship, or an agreement between an employer and an employee with respect to severance pay, under which the employee or expected employee agrees not to engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.” (Emphasis added.)

It remains an open question whether provisions outside the parameters of traditional covenants not to compete (such as employee or customer non-solicitation provisions, or non-disclosure provisions) would fall within this statutory definition of “restrictive covenants.”  Other sections of the bill, however, suggest that traditional “non-competition” covenants are the only “restrictive covenants” at issue.  The bill contains an explicit presumption that “restrictive covenants” are necessary where an employer cannot adequately protect its interests through an “alternative agreement, including . . . an agreement not to solicit or hire employees of the employer; [or] an agreement not to solicit or transact business with customers, clients, referral sources, or vendors of the employer[.]”

As we previously discussed in detail, the bill, if made into law, would impose a host of new regulations on such “restrictive covenants,” including:

  1. A garden leave requirement, under which an employer must pay most former employees 100 percent of the wages and fringe benefits to which they would otherwise be entitled during the enforcement of a restrictive covenant. There is an exception to the garden leave requirement for employees terminated for “misconduct.” The term “misconduct” is a new concept in this newest iteration of the bill and is discussed in more detail below. Note that if the bill becomes law, New Jersey would become the first state in the country to require garden leave during the enforcement period for a restrictive covenant.  (As we previously observed, the Massachusetts Noncompetition Agreement Act, which shares many features with the New Jersey bill, does not actually require garden leave.)
  2. A prohibition on judicial modification of restrictive covenants that are found to be overly restrictive or otherwise in violation of the law.
  3. A limitation on the temporal scope of restrictive covenants to one year.
  4. A limitation on the geographic scope of restrictive covenants to the areas “in which the employee provided services or had a material presence or influence during the two years preceding” separation of employment. There is a qualification that the restrictive covenant “shall not prohibit an employee from seeking employment in other states,” but it’s unclear whether “seeking employment” is intended to be treated the same as engaging in “competition.”
  5. A prohibition on the enforcement of restrictive covenants for several broad categories of employees, such as:
    1. Employees classified as nonexempt under the Fair Labor Standards Act;
    2. Undergraduate or graduate students who intern or engage in short-term employment while they remain enrolled in school;
    3. Apprentices who meet the applicable federal or state apprenticeship qualifications;
    4. Seasonal or temporary employees;
    5. Independent contractors;
    6. Employees under the age of 18;
    7. Employees who have been terminated without a determination of misconduct, or have been laid off by the employer;
    8. “Low-wage” employees, defined as employees whose weekly wage is less than the state-wide average, as determined by the New Jersey Department of Labor and Workforce Development (which under last available data is $1,291.42 per week, equivalent to $67,153.84 per year); and
    9. Employees whose period of service with the employer is less than one year, making no distinction based on the reason for the separation or whether it was voluntary or involuntary.
  6. Procedural obligations on employers, such as:
    1. Disclosure of the restrictive covenant agreement in writing to prospective employees “by the earlier of a formal offer of employment, or 30 business days before the commencement of . . . employment.”
    2. Disclosure of the restrictive covenant agreement to existing employees at least 30 business days before the effective date.
    3. An express statement that the employee has the right to consult with counsel before signing a restrictive covenant agreement.
    4. A ten-day window after separation of employment where the employer must inform most employees if it intends to require compliance with the post-employment restrictions. As with the garden leave requirement, there is an exception discussed below.

Despite being nearly identical, there is one subtle, but material, distinction between the old bill and the new bill.

Under the old bill, restrictive covenants would not be enforceable at all against employees terminated without “good cause,” and if the employee were terminated with “good cause,” then neither the garden leave nor the post-separation ten-day “notice of intent” window would apply for the employer.

Under the new bill, the same carve-outs exist for both employees and employers, but the triggering event is termination with or without a determination of “misconduct,” as opposed to termination with or without “good cause.”

Termination for “good cause” is broader than termination for “misconduct” under the language of the bills.  The definition of “good cause,” for example, included poor work habits like inefficiency, working “belatedly and negligently,” or working “in violation of the standards of quality of the establishment.”  “Misconduct” is defined under the new bill as “conduct which is improper, intentional, connected with the individual’s work, within the individual’s control, not a good faith error of judgment or discretion, and is either a deliberate refusal, without good cause, to comply with the employer’s lawful and reasonable rules made known to the employee or a deliberate disregard of standards of behavior the employer has a reasonable right to expect, including reasonable safety standards and reasonable standards for a workplace free of drug and substance abuse.”

In short, all of the limitations on and requirements for restrictive covenants contained in the proposed statute would apply if the employee were terminated for narrowly defined “misconduct,” except the garden leave and “notice of intent” provisions.  No restrictive covenant would be enforceable against any employee terminated without a determination of “misconduct.” If an employee voluntarily resigns, then the restrictive covenants could be enforceable, with the garden leave and “notice of intent” requirements.

The bill would take effect immediately upon becoming law, but would not apply to any agreement in effect on or before the date of enactment.

We will continue to monitor the progress of Assembly Bill 1650 as it makes its way to the General Assembly floor.  In the meantime, New Jersey employers should consider taking proactive steps to protect their legitimate business interests through means that would not be in jeopardy, or be prepared to take prompt and necessary steps to comply if and when the bill were to become law.  Jackson Lewis attorneys are available to assist.

Employers’ Toolbox Series: Lessons on Ex Parte Seizure in Five Years of the DTSA

(This is part of the Restrictive Covenant Report “Employers’ Toolbox Series,” where we examine lesser-utilized methods of protecting confidential information, trade secrets, and other business interests.)

The Defend Trade Secrets Act (“DTSA”), 18 U.S.C. § 1836, et seq., is approaching its fifth anniversary after being signed into law by President Barack Obama on May 11, 2016.  To celebrate, we are highlighting some of the issues that have developed in five years of litigating the law’s most notorious feature: ex parte seizure orders.

As we wrote just before the DTSA was signed into law, the ex parte seizure provision has always been controversial.  Under the DTSA, an ex parte seizure order permits immediate confiscation of private devices like desktop computers, laptops, smartphones, or tablets without any advance notice to the device owner, and on the strength of the applicant’s evidence only.  Once granted, the order is served and executed by U.S. Marshalls or other law enforcement officers, similar to a criminal search warrant.

In the five years since the passage of the DTSA, a small but growing body of case law is developing on some important procedural and practical issues arising from ex parte seizure.

  1. Moving to Have the Ex Parte Seizure Application Filed Under Seal

The DTSA contains detailed instructions for obtaining an ex parte seizure order.  Because of the high evidentiary threshold needed for such extraordinary relief, applicants almost always will need to present documentary evidence along with the required affidavit or verified complaint.  Critically, the DTSA does not permit entry of an ex parte seizure order unless the court finds that the applicant “has not publicized the requested seizure.”  18 U.S.C. § 1836(b)(2)(A)(ii)(VIII).

The DTSA does not define the term “publicized.”  It is unclear whether filing seizure application materials on the public docket could constitute “publicizing” them.  Perhaps in an abundance of caution, many applicants simultaneously move to have the seizure application materials filed under seal.  Several courts have concluded that the applicant “has not publicized” the requested seizure where the application materials were filed under seal.  See, e.g., Shumway v. Wright, No. 4:19-cv-00058-DN-PK, 2019 U.S. Dist. LEXIS 148882 (D. Utah Aug. 26, 2019); Thoroughbred Ventures, LLC v. Disman, No. 4:18-cv-00318-ALM, ECF No. 6 (E.D. Tex. May 1, 2018).

However, applicants should not treat the motion to seal as a mere formality.  If the applicant fails to meet the legal requirements for filing under seal, that motion could be denied, and in turn could jeopardize the request for emergency relief.  See Corelogic Sols., LLC v. Geospan Corp., No. SACV 20-01500-CJC(KESx), 2020 U.S. Dist. LEXIS 246349, at *9 (C.D. Cal. Aug. 21, 2020) (denying motion to seal an application for a temporary restraining order where the applicant did not make a “document-by-document” showing of “good cause” to merit protection of alleged trade secret information from public disclosure).

  1. Seeking a TRO as a Backup to DTSA Seizure

Understandably, the DTSA sets a very high bar for ex parte seizure—higher, even, than the standard to obtain an ex parte temporary restraining order.  But these are not mutually exclusive remedies.

Even if a court denies the applicant’s motion for ex parte seizure under the DTSA, the court still can grant a motion for a temporary restraining order preventing the defendant from taking potentially harmful actions.  See Cochrane USA, Inc. v. Filiba, No. 18-341 (EGS), 2018 U.S. Dist. LEXIS 185726, at *9-10 (D.D.C. Mar. 9, 2018) (denying a motion for ex parte seizure under the DTSA because the applicant failed to establish “extraordinary circumstances” justifying seizure, but granting a motion for temporary restraining order preventing the defendants from “destroying, altering, modifying, forwarding, utilizing, disposing of, or in any other manner changing/altering or dismantling” the applicant’s data).

Temporary restraining orders are still powerful remedies that can be requested in the alternative to or in conjunction with ex parte seizure under the DTSA.  Indeed, even prior to the enactment of the DTSA, temporary restraining orders, including, if warranted, ex parte orders allowing for immediate seizure of electronic media by U.S. Marshalls or other law enforcement officers, were a valuable tool.  Although difficult to obtain and only applicable in limited circumstances, such orders remain an effective substitute for the DTSA’s more rigid seizure protocol.

Unsurprisingly, trade secret litigation has increased since the DTSA’s enactment. New issues relating to the controversial ex parte seizure provision will certainly crop up as more cases are filed. We will continue to monitor developments in this area of the law, and we will update the blog with new insights as they arise.

D.C. Mayor Signs Bill to Ban Non-Competes

The District of Columbia appears poised to join the growing number of nearby states regulating and limiting restrictive covenant agreements in the employment context.

Unanimously passed by the D.C. City Council on December 15, 2020 and signed by Mayor Muriel Bowser on January 11, 2021, the “The Ban on Non-Compete Agreements Amendment Act of 2020” goes further than recent laws enacted across the country.  It is a ban on virtually all non-compete agreements.

Specifically, the bill would prohibit employers from requiring or requesting that their employees not: (1) be employed by another person; (2) perform work or provide services for pay for another person; or (3) operate their own business.  Remarkably, the ban would potentially apply during employment, not just after an employee leaves.  How courts would reconcile the ban during employment with common law fiduciary duties and the duty of loyalty remains to be seen.

Now that the Mayor has signed the bill, it will be sent to Congress for review and will become law unless Congress passes a joint resolution disapproving it and the President signs that resolution within a thirty-day period.  The law will become applicable upon approval of a budget and financial plan that includes its fiscal effect. This is expected to take place later this year when the District of Columbia’s 2022 budget and financial plan is approved.

Our Practice Group members explore these issues and others in our article on the potential ramification of the bill and the procedural steps needed for it to become law.  We will continue to monitor the bill’s status and its impact, and we will provide updates on material developments.

New Indiana Law Governs Physician Non-Compete Agreements

In the midst of the COVID-19 pandemic, Indiana has enacted a new law governing non-compete agreements used with physicians.

Our Practice Group members in Indianapolis authored an article detailing the new law’s requirements.  As the article notes, the new law raises multiple unanswered questions.

And, while not as sweeping as other statutes, Indiana now joins the parade of states enacting new laws limiting the use of non-compete agreements.  We will continue to monitor all state law developments.

LexBlog