§ 9.1.1 First Circuit
Over the last year, the First Circuit has not seen a significant change in how courts have addressed noncompete and trade secret litigation. Since the Federal Trade Commission proposed a rule banning noncompete agreements in January of this year, none of the jurisdictions within the First Circuit have sought to jump ahead of the FTC by introducing new laws to ban noncompete agreements. Recent litigation in this jurisdiction has primarily been state and federal courts deciding what agreements are valid under the current statutory framework.
Below are two examples from Massachusetts, one from federal court and one from state court. The first case is from last year, when the Federal District Court for the District of Massachusetts issued a decision on the validity of two separate noncompete agreements, one signed at the commencement of employment and the other signed mid-employment under the Massachusetts Noncompetition Agreement Act. The second is from the Massachusetts Superior Court, in which the Court issued a decision clarifying sale of business exception under the statute, specifically regarding the sale of client relationships.
Cynosure LLC v. Reveal Lasers LLC, No. CV 22-11176-PBS, 2022 WL 18033055 (D. Mass. Nov. 9, 2022). In this case, the District Court of Massachusetts was tasked with determining whether two separate noncompete agreements with a Delaware choice of law provision were enforceable under the Massachusetts Noncompetition Agreement Act (“MNAA”). The case arose after Cynosure sought a preliminary injunction to enforce noncompete provisions against two former employees. However, the two employees signed the agreements at different points in their employment. The first employee entered into the agreement during his employment in exchange for a stock purchase agreement, while the second employee entered into the agreement at the beginning of his employment. Although the two agreements contained a Delaware choice of law provision, the Court stated that the provision was “valid only if it does not have the primary effect of voiding Massachusetts law.” The MNAA, which governed the agreements, had two specific requirements for an agreement made during employment: (1) “fair and reasonable consideration;” and (2) “mutually agreed upon consideration” or “garden leave.” Since the employee was offered a stock purchase agreement in exchange for signing the noncompete agreement, the Court found that Cynosure had the met the “fair and reasonable consideration” and “mutually agreed upon consideration” requirements along with holding that the agreement satisfied the remaining requirements of the MNAA, thus making it enforceable. As to the second employee, the Court did not have to analyze the sufficiency of consideration, because Cynosure failed to advise the employee of his right to consult counsel as explicitly required by the MNAA when the noncompete agreement is signed at the commencement of employment, thus rendering the agreement unenforceable as to the second employee.
Lighthouse Insurance Agency, Ltd v. Lambert, 2284CV01162, Mass. Super. (June 8, 2022) (unpublished). In Lighthouse, Lambert worked for Lighthouse Insurance Agency as a licensed insurance producer from 2013 to 2021. Prior to October 2020, Lambert’s employment agreement paid him 50 percent commission for new accounts and 40 percent for any renewals by those accounts. In October 2020, Lighthouse offered Lambert a new employment agreement with an $80,000 salary along with 40 percent commission for new accounts. The new employment agreement also contained noncompetition provisions that restricted Lambert from working for a competitor for a year after leaving Lighthouse. Lighthouse also offered to “buy back Lambert’s existing commission rights” to the renewals. Lighthouse characterized the offer as the company buying Lambert’s “book of business” by purchasing his relationship with those clients. Lambert signed the new agreement the day it was offered to him, which took effect immediately. Lighthouse terminated Lambert on July 15, 2021. Lambert then went to work for a competing insurance company in late March 2022. In early April 2022, he received a call from the CEO of a Lighthouse client who told him he would move the company to Lambert’s new employer because he wanted to continue working with Lambert. Lambert did not ask the client to move, but once Lighthouse found out, it sued him. As a baseline issue, the Court found the noncompete agreement to be invalid because it failed the basic requirements of the MNAA, including giving Lambert at least 10 days’ advance notice and notifying Lambert of his right to consult counsel before signing the agreement. The Court then addressed Lighthouse’s argument that the MNAA did not apply because the agreement fell under the sale of business exception. The Court ultimately rejected the argument, holding that the exception did not apply because Lambert did not sell a business to Lighthouse. The Court noted that Lambert did not own the accounts he received commission from and that they belonged solely to Lighthouse. Therefore, Lambert could not sell or assign any interest to those accounts to Lighthouse or anyone else. In the Court’s view, what Lighthouse had actually done was convert Lambert’s continuing right to commission on the renewals into a new right for a fixed salary. Because there was no sale of business, the Court’s original MNAA analysis applied, and the preliminary injunction was denied.
§ 9.1.2 Second Circuit
Over the last year, the First Circuit has not seen a significant change in how courts have addressed noncompete and trade secret litigation. However, there are some notable cases to be aware of, as detailed below.
Employment Mobility (Breach of Duty of Loyalty; Fiduciary Duties)
Onyx Renewable Partners L.P. v. Kao, No. 22-CV-3720 (RA), 2023 WL 405019 (S.D.N.Y. Jan. 25, 2023) (finding the plaintiff adequately pled defendant’s breach of the fiduciary duties of loyalty, care, and good faith under Delaware law because plaintiff plausibly alleged that defendant misappropriated plaintiff’s trade secrets, where defendant’s role as plaintiff’s former general counsel established fiduciary duties because plaintiff was responsible for “critical matters” such as development contract negotiations and financing arrangements, and the plaintiff’s limited partnership agreement did not “clearly and unambiguously express[] the parties’ intent” to limit or eliminate fiduciary duties by disclaiming that defendant should render services “faithfully” and “to the best of his ability,” where defendant allegedly misappropriated plaintiff’s trade secrets by downloading confidential and protected files to an external drive prior to their resignation and later starting a competitor company).
Iacovacci v. Brevet Holdings, LLC, No. 1:18-CV-08048-MKV, 2023 WL 2631966 (S.D.N.Y. Mar. 24, 2023), reconsideration denied, No. 1:18-CV-08048-MKV, 2023 WL 4118086 (S.D.N.Y. June 22, 2023) (denying plaintiff’s motion for summary judgment on breach of covenant counter-claim because a question of fact remained regarding whether plaintiff agreed to be legally bound by the noncompete and confidentiality provisions of their employer’s handbook, where plaintiff acknowledged receipt of handbook language, which stated that the “employee agrees and understands that if they violate these policies, they will be subject to discipline . . . and shall be responsible for all damages sustained by [company] as a result of such violation”).
Restrictive Covenants (Covenants Not to Compete)
Connecticut Public Act No. 23-97, effective October 1, 2023, (1) expands the existing physician noncompete law to restrict noncompete agreements entered into with physician assistants (PA) and advanced practice registered nurses (APRN), and (2) amends Connecticut’s noncompete law for physicians. Like physicians, PAs and APRNs may not be subject to noncompete agreements with a duration of more than one year. See Public Act No. 23-97 § 14(1)(b)(2), 15(1)(b)(1). Restrictions on competition are limited to a fifteen-mile radius from the PA’s or APRN’s primary site of practice as identified in the agreement. See id. Further, PA and APRN agreements are subject to a statutory reasonableness analysis applying a set of factors. See id. § 14(1)(b)(1), 15(1)(b)(1). Any agreement with a physician entered into, amended, extended, or renewed on or after October 1, 2023, will not be enforceable in the event that the physician “does not agree to a proposed material change to the compensation terms” in the contract or agreement “prior to or at the time of the extension or renewal of the contract or agreement”; and “the contract or agreement expires and is not renewed by the employer or the employment or contractual relationship is terminated by the employer, unless such employment or contractual relationship is terminated by the employer for cause.” See id. § 13(b)(3) (exempting practices of thirty-five or fewer physicians the majority ownership of which is comprised of physicians). The parties must identify the physician’s primary practice site in the noncompete agreement and limit the definition of “primary site” to “any singe office, facility, or location where [the] physician practices.” See id. § 13(a)(1).
Customer & Employee Nonsolicitation Agreements
Davis v. Marshall & Sterling, Inc., 217 A.D.3d 1073, 191 N.Y.S.3d 207 (2023) (finding enforceable defendant insurance company’s nonsolicitation and post-termination commission sharing employment provisions enforceable against plaintiff former employees who founded their own insurance company and took nine former clients because, although “generally not favored,” defendant had a “valid business interest to protect” because defendant “solicited, developed, and serviced” those clients such that the clients were the “product of defendant’s efforts, financial expenditures, and goodwill, all of which defendant has a legitimate interest in protecting,” further noting that plaintiffs had neither “any prior experience in the insurance field . . . nor did they have any clients or books of business of their own” when they joined defendant’s insurance agency).
Misappropriation of Trade Secrets
Syntel Sterling Best Shores Mauritius Ltd. v. The TriZetto Grp., Inc., 68 F.4th 792, 804 (2d Cir. 2023), cert. denied sub nom. Trizetto Grp., Inc. v. Syntel Sterling, No. 23-306, 2023 WL 7117087 (U.S. Oct. 30, 2023) (affirming the district court’s denial of plaintiff’s Rule 50(b) motion upon a jury’s finding that plaintiff misappropriated defendant’s trade secrets and rejecting plaintiff’s argument that the deletion of the noncompete provision in the parties’ master services agreement (MSA) authorized plaintiff to use defendant’s trade secrets to compete with defendant, finding that plaintiff was still obligated to abide by the MSA’s confidentiality provisions, and the deletion of the noncompete provision did not “effectively expand[]” the definition of “Services” to authorize plaintiff to leverage defendant’s trade secrets for any services performed for third parties in competition with defendant because the amendment to the noncompete provision identified the definitions impacted and did not identify “Services,” and the MSA separately prohibited plaintiff from “commercially exploit[ing]” any of defendant’s data).
Damages
Syntel Sterling Best Shores Mauritius Ltd. v. The TriZetto Grp., Inc., 68 F.4th 792, 804 (2d Cir. 2023), cert. denied sub nom. Trizetto Grp., Inc. v. Syntel Sterling, No. 23-306, 2023 WL 7117087 (U.S. Oct. 30, 2023) (vacating the district court’s $285 million compensatory damages award for avoided costs under the Defend Trade Secrets Act (DTSA) because the DTSA does not permit recovery of avoided costs, “i.e., the costs a trade secret holder had to spend in research and development that a trade secret misappropriator saves by avoiding development of its own trade secret,” as unjust enrichment where plaintiff’s unjust gain was addressed in computing lost profits for defendant’s actual loss, and defendant suffered no compensable harm beyond that loss, because “those profits were the only enrichment [plaintiff] unjustly gained at [defendant]’s expense,” and plaintiff’s “onetime use of the trade secrets . . . did not jeopardize their continued value” to defendant, as defendant retains their profitable use and a permanent injunction prohibits plaintiff from using them in the future, where “focusing exclusively” on the DTSA’s compensatory damages provision to award avoided costs “ignores the extent to which [plaintiff]’s misappropriation injured [defendant] and impermissibly discounts the comparative appraisal that governs equitable trade secret remedial determinations,” which would distort the DTSA’s remedial scheme by permitting avoided costs awards that “are more punitive than compensatory” and ignore the DTSA’s separate provision for punitive damages).
§ 9.1.3 Third Circuit
Recent Third Circuit cases have revolved around challenging employer’s efforts to protect proprietary information and employing noncompete agreements.
Although no heightened pleading standard governs claims related to proprietary information, courts increasingly dismissed claims for insufficient pleading. In Illumina, Inc. v. Guardant Health, Inc., 2023 U.S. Dist. LEXIS 15865 D. Del. Jan. 31, 2023, the District of Delaware granted defendant’s motion to dismiss all but one claim because the complaint lacked sufficient factual support for its allegations, including trade secret misappropriation, because plaintiffs failed to both identify the trade secrets within 51,000 emails allegedly misappropriated and distinguish which emails contained trade secrets. Conversely, plaintiffs identified both the specific documents purportedly containing trade secrets and protected content at issue related to the lone misappropriation claim that survived. Similarly, in IQVIA, Inc. v. Breskin, 2023 U.S. Dist. LEXIS 47174 (E.D. Pa. Mar. 20, 2023), the Eastern District of Pennsylvania dismissed plaintiff’s misappropriation claims for failure to identify the trade secrets claimed within some 10,000 documents or to distinguish trade secrets from confidential information.
Conversely, providing too much information in initial pleadings may preclude success on a request for preliminary injunction. In JRM Construction Management, Inc. v. Plescia, 2023 U.S. Dist. LEXIS 59380 (D.N.J. Apr. 4, 2023), the District of New Jersey found defendant’s denials and alternate explanations underscored significant disputes of material fact that undermined its ability to show reasonable likelihood of success on the merits and irreparable harm for purposes of the TRO, preliminary injunction, and request for expedited discovery.
The Delaware Chancery Court has recently made a number of significant noncompete decisions. First, in Kodiak Building Partners, LLC v. Adams, 2022 WL 5240507 (Del. Ch. Oct. 6, 2022), the court nullified an overly broad noncompete arising out of the sale of a business, finding the agreement unlawfully restricted competition with any business in the purchasing company’s portfolio, not just the business of the purchased company. The Kodiak court also refused to revise the noncompete, notwithstanding Delaware law permitting courts to reform overly broad noncompetes and the language of the agreement explicitly permitted the court to revise the agreement. Id. at n.49. Second, in Ainslie v. Cantor Fitzgerald, L.P., 2023 WL 106924 (Del. Ch. Jan. 4, 2023), the same court invalidated a noncompete and a forfeiture-for-competition provision in a partnership agreement. Just like in the Kodiak case, the Ainslie court refused to revise the agreement. Third, in Intertek Testing Services NA, Inc. v. Eastman, 2023 WL 2544236 (Del. Ch. March 16, 2023), the court refused to enforce or revise a noncompete accompanying the sale of a business when the geographic scope extended worldwide, which includes areas where the previous employer did not conduct business. Finally, in Frontline Technologies Parent LLC et al. v. Murphy, 2023 WL 5424802 (Del. Ch. Aug. 23, 2023), the court refused to enforce or revise a noncompete that prohibited the employees from working for a competitor of the holding company when the employees worked for a competitor of the operating subsidiary.
§ 9.1.4 Fourth Circuit
Much like the rest of the country, the Fourth Circuit has seen new laws that affect noncompete agreements. In Maryland, employers are now prohibited from entering into noncompete agreements with low-wage workers, who earn 150 percent of the minimum wage. Maryland recently enacted the Fair Wage Act of 2023, effective January 1, 2024, which increases the minimum wage from $13.25 to $15 per hour. Under Senate Bill 591, the salary threshold for noncompete agreements will increase from $19.88 to $22.50 per hour, for an annual income of $41,350 in 2023 or $46,800 in 2024.
Additionally, the Fourth Circuit has authored new jurisprudence impacting trade secret litigation. The Court’s decision in Synopsys, Inc. v. Risk Based Sec., Inc., No. 22-1812, 2023 WL 4009505 (4th Cir. June 15, 2023), highlights that trade-secret plaintiffs must prove that their secret information is not just commercially valuable, but that it has independent economic value because it is a secret. Risk Based Security Inc. (RBS) and Synopsys Inc. (Synopsys) were both companies involved in identifying vulnerabilities in open-source software. RBS sued Synopsys, alleging that it misappropriated RBS’s trade secrets in a database RBS compiled and licensed to other companies. RBS claimed that Synopsys used the licensed database to develop its own database, violating the license agreement and misappropriating seventy-five RBS trade secrets. The court held that a general showing of a company’s acquisition price and licensing revenue, without a nexus to the asserted trade secret, was not evidence of the asserted trade secrets’ independent economic value. Moreover, the court found that the evidence did not satisfy the statutory definition of a trade secret under both Virginia and federal law. The decision emphasizes that companies cannot show that a trade secret derives its value from being kept secret, but rather need to demonstrate economic evidence tied to the trade secret’s value. Further, employers should take reasonable efforts to maintain secrecy of such trade secrets to meet the definition of a trade secret.
§ 9.1.5 Fifth Circuit
The Fifth Circuit has seen a few cases that practitioners ought to be aware of, however we have not seen any new laws within the last year impacting trade secrets or related claims.
Joe Formicola v. Virtual Integrated Analytics Solutions, LLC, 14th Court of Appeals, Texas, Case No. 14-22-00412-CV (overturning trial court’s ruling finding that even when defendant admitted he received misappropriated trade secrets, plaintiff’s claim will be dismissed for lack of jurisdiction).
Teligistics Inc. v. Advanced Personal Computing Inc. et al., No. 2019-15000, in the 190th District Court of Harris County, Texas (jury verdict finding that (1) affixing a confidentiality label to a document does not necessarily make the information within a trade secret, and (2) it is acting in bad faith when one improperly alleges misappropriation of trade secrets (i.e., when there is no true confidentiality)).
§ 9.1.6 Sixth Circuit
Over the past year, the Sixth Circuit has seen slight changes in state noncompete law and some high-profile cases related to both noncompete laws and trade secret misappropriation.
Kentucky recently amended Kentucky Revised Statute Section 216.724, which places restrictions on contracts that health care services agencies (“HSA”) can have with their staff. The amendments, effective June 28, 2023, specify that HSAs are restricted in their contractual relations with temporary direct care staff, rather than direct care staff generally. Thus, HSAs cannot restrict temporary direct care staff’s employment opportunities, nor require the payment of damages should a temporary direct care staff member be hired permanently by an employer that has contracted the staff member’s work except under certain circumstances.
An Ohio court also recently considered whether information otherwise accessible to the public qualified as a “trade secret” under the Ohio Uniform Trade Secrets Act (“OUTSA”) in Hanneman Fam. Funeral Home & Crematorium v. Orians, 2023-Ohio-3687 (Ohio 2023). There, plaintiff brought action against its former director and his current employer alleging misappropriation of trade secrets, tortious interference, and conversion based on the former director copying the plaintiff’s customer information before leaving to work for his current employer. On appeal, the Supreme Court of Ohio affirmed summary judgment for defendants, holding that information about customers who had pre-need funeral contracts was not a “trade secret” protected by the OUTSA. Id. at *4. The Court opined that the customer information at issue was not “kept secret” as it was accessible to various employees, provided to third parties, and was available as a public record if requested from the state. Id. at *3. Further, the Court affirmed the holding that the OUTSA preempted plaintiff’s tortious interference and conversion claims as they were based solely on the unauthorized use of its information as alleged in its misappropriation-of-trade-secrets claim. Id. at *4.
In United States v. Xiaorong You, 74 F.4th 378 (6th Cir. 2023), the Sixth Circuit upheld the conviction of a chemical engineer found guilty of conspiracy to commit theft of trade secrets, possession of stolen trade secrets, wire fraud, conspiracy to commit economic espionage, and economic espionage. You, a former employee of Coca-Cola and the Eastman Chemical Co. of Tennessee, stole trade secrets related to BPA-free aluminum can liners with the intent of creating a new company in China that would manufacture the BPA-free chemical. Id. at 384–385. You appealed her conviction, arguing that the jury instructions misstated the intent requirements for trade secret theft, among other claims. Id. at 387. Specifically, You claims the instructions were insufficient because they “failed to require proof that she knew that (1) the owners had taken ‘reasonable measures’ to protect the information; and (2) the information was valuable, in part, because it was secret.” Id. at 391. The Sixth Circuit rejected You’s claims under a plain error review, as the alleged error in the jury instructions did not affect You’s substantial rights. You knew of the measures taken to protect the trade secrets as she certified she did not keep any confidential information in her severance agreement with Coca-Cola. Id. at 392. Further, You knew the information was valuable because she emphasized the value of the BPA-free chemical in her application for a national grant through China’s Thousand Talents program. Id. The Court reached a similar conclusion under de novo review of the jury instructions. Id. at 393.
§ 9.1.7 Seventh Circuit
Over the past year, the Seventh Circuit has seen developing jurisprudence construing Illinois statutory noncompete, nonsolicitation, and trade secrets provisions, and the federal Defend Trade Secrets Act (“DTSA”), rulings on the sufficiency of pleading trade secret misappropriation and tortious interference claims, and a new Indiana noncompete statute.
The Illinois Freedom to Work Act, effective January 1, 2022, applies to agreements entered into on or after that date, rendering void and unenforceable certain restrictive covenants unless minimum annual employee compensation thresholds are met—in excess of $75,000 for noncompetes and in excess of $45,000 for nonsolicits. Courts this past year have held that this statute does not have retroactive effect; thus, it is inapplicable to conduct or agreements entered into before January 1, 2022. In addition, courts have held mere compliance with the minimum pay requirement does not establish per se enforceable restrictive covenants. They still must satisfy common-law principles (codified in another state statute at 820 Ill. Comp. Stat. Ann. 90/15), e.g., employees must receive adequate consideration, the covenant must be ancillary to a valid employment relationship, etc.
Federal district courts in the Seventh Circuit also have rejected the contention that under each of the Illinois Trade Secrets Act (“ITSA”) and DTSA, a written confidentiality agreement must exist in order to establish that a trade secret exists. These decisions recognize employers can maintain secrecy via other steps, like physically securing facilities and limiting employee access to a need-to-know basis. Yet, as the Illinois Court of Appeal held this year, employers must take affirmative measures to prevent others from acquiring or using information for it to qualify as a trade secret under the ITSA. In Total Staffing Solutions, Inc. v. Staffing, Inc., 2023 IL App (1st) 220533 (Ill. Ct. App. June 23, 2023), plaintiff brought a misappropriation of trade secrets claim under the ITSA against a competitor firm created by former employees. Evidence showed that the plaintiff had freely provided to one of its customers, upon request, the information that the plaintiff asserted in the litigation was a trade secret, consisting of its employee names, pay rates, and bill rates. Id. at 19. The Court ruled that when the plaintiff “did not treat the information as confidential and secret,” it was not a protected trade secret. Id. at 19–21.
With regard to the sufficiency of pleading claims under the DTSA, several district courts held it is enough that the complaint alleges broad categories of information without identifying a particular trade secret, so long as facts are alleged that support a plausible inference that the company derives economic value from the information not being generally known or ascertainable.
In terms of new state statutes, Indiana enacted a new noncompete law related to primary care physicians and to physicians in Indiana Code Section 25-22.5-5.5-1 through Section 25-22.5-5.5-4. Effective July 1, 2023, this law bans any noncompete agreements entered into on or after July 1, 2023, between an employer and (specifically) a primary care physician (i.e., family, general pediatric, or internal medicine). The new law also states noncompete agreements between a physician and employer entered into on or after July 1, 2023, are unenforceable if the employer ends the employment without cause, the physician ends the employment for cause, or both parties have fulfilled their respective obligations when the employment contract expires. Also, for noncompetes entered into on or after July 1, 2023, if physicians elect to exercise a contract buyout option, the new law requires good faith negotiations to determine a reasonable purchase price, and specifies a mediation process for this purpose if needed.
Last, pending before the United States Supreme Court is a petition for a writ of certiorari filed by McDonald’s USA, LLC, seeking review of whether “no-poach” clauses previously (but no longer) used in its franchise agreements violated the federal Sherman Antitrust Act. The case, Deslandes v. McDonald’s USA, LLC, is a class-action antitrust suit filed in 2017 by a manager who had to decline a higher-paying job at another McDonald’s franchise due to contract terms prohibiting franchise operators from hiring one another’s employees for six months post-employment. The claim was rejected by the district court and appealed to the Seventh Circuit, where the Federal Trade Commission and U.S. Department of Justice jointly filed an amicus brief in support of the workers, and where the Seventh Circuit vacated the judgment and remanded the case. Deslandes v. McDonald’s USA, LLC, 81 F. 4th 699 (7th Cir. 2023).
§ 9.1.8 Eighth Circuit
Over the past year, the Eighth Circuit has seen several new laws implicating employee mobility and restrictive covenants.
In Iowa, the Legislature adopted new legislation aimed at limiting noncompete agreements for licensed mental health professionals. The law prohibits agreements with “licensed mental health professional[s]” that limits the location in which the licensee may practice, prohibits the licensee from contacting a person previously treated by the licensee, or imposes a time restriction on the practice of the licensee. The law applies retroactively.
In Minnesota, a new law bans noncompetes entered into on or after July 1, 2023. The ban expressly does not apply to nondisclosure, confidentiality, trade secret, or nonsolicit agreements. The law also prohibits, as a condition of employment, an employer from requiring an employee to a choice of law provision if the employee primarily resides in Minnesota. Lastly, the scope of the law extends to include certain independent contractors.
Bucking the trend of limits on restrictive covenant agreements, Missouri specified that specified restrictive covenant agreements between entities and owners are enforceable under certain circumstances. Specifically, the law applies to agreements which “promis[e] not to solicit, recruit, hire, induce, persuade, encourage, or otherwise interfere with, directly or indirectly, employees or owners of a business entity.” Moreover, the law directs courts to modify restrictive covenants which are “overbroad, overlong, or otherwise not reasonably necessary to protect the protectable business interests of the business entity seeking enforcement[.]” However, the law expressly does not affect noncompetes, nondisclosure, or confidentiality agreements or any agreement impacting the owner’s ability to seek or accept employment with another business entity upon termination of the owner’s relationship with a business entity.
In South Dakota, a new law limits post-employment restrictive covenants on healthcare professionals. The law provides that a contract provision entered into on or after July 1, 2023, is voidable if it restricts a healthcare professional, as defined by law, from “practicing or otherwise providing professional services in accordance with the applicable scope of practice, after the conclusion of the practitioner’s employment or after the dissolution of a partnership or other form of professional relationship.”
§ 9.1.9 Ninth Circuit
Over the past year, the Ninth Circuit has seen few developments regarding employee mobility, restrictive covenants, and trade secrets. Most case discussions have concerned the arbitrability of these types of claims. Courts in this Circuit consistently apply the Supreme Court’s heightened standard of requiring “clear and unmistakable” evidence of an agreement to arbitrate arbitrability. And cases have held that the incorporation of the rules of certain arbitral forums, like the AAA rules, constitutes clear and unmistakable evidence of such, but it is not issue specific. See Maguire Insurance Agency, Inc. v. Amynta Agency, Inc., 652 F.Supp.3d 1313, 1321 (W.D. Wash. 2023).
That being said, there were some notable decisions. For instance, in February 2023, the Ninth Circuit issued its decision in Chamber of Commerce of the United States v. Bonta, 62 F.4th 473 (9th Cir. 2023) which held that the Federal Arbitration Act (FAA) preempts California Assembly Bill 51. That bill attempted to protect employees by making it a misdemeanor for an employer to require an employee to sign an arbitration agreement as a condition of employment. There, in 2019, several trade associations sought a declaration that AB 51 was preempted by the FAA, a permanent injunction prohibiting California officials from enforcing it, and a temporary restraining order. Id. at 480–81. The Ninth Circuit affirmed the district court’s ruling granting the plaintiffs’ motion for preliminary injunction and, that the FAA’s preemptive scope is not limited and, therefore, Bill 51’s imposition of civil and criminal penalties is an “unacceptable obstacle to the accomplishment and execution of the full purpose and objects of Congress in enacting the FAA.” Id. at 481, 483, 489.
Cases that came down this year also reiterated that there remains a divide between the states within the Ninth Circuit about whether noncompete agreements are void or enforceable. Kibble & Prentice Holding Company v. Tilleman, 643 F.Supp.3d 1123 (2022) is instructive. There, the District Court of Idaho held that a noncompete agreement was enforceable because the restrained party was a “key employee” based on the expertise and experience he gained while working with his former employer to garner client relationships. Id. at 1134. The time restraint in the agreement was reasonable even though it exceeded the eighteen-month statutory limit in Idaho because there was consideration given for the extra months. Id. at 1136. Idaho and Oregon laws agree that goodwill developed by an employee belongs to the employer and the employer is entitled to protect itself. Id. at 1137.
By contrast, California recently enacted legislation to solidify its stance on the unenforceability of noncompete agreements with new laws that are set to take effect in 2024. In September 2023, Governor Gavin Newsom signed Senate Bill 699, which prohibits employers from entering or attempting to enforce noncompete agreements and establishes that such agreements are void in California. The law states that these contracts are void in California regardless of where and when the contract is signed. This will prohibit employers outside of California from attempting to prevent former employees from being hired in California. The law also creates new enforcement rights for employees by enabling them to bring private actions to enforce the law and allows the prevailing plaintiff to recover injunctive relief or actual damages, or both. This will deviate from prior trends of these claims being litigated as declaratory relief actions by raising the risk that employers may face. SB 699 will be codified as Section 16600.5 of the California Business and Professions Code and will go into effect on January 1, 2024.
Finally, in October 2023, Governor Newsom signed Assembly Bill 1076, which will work together with SB 699 to further reinforce California’s ban on noncompete agreements. It will codify a 2008 California Supreme Court decision in Edwards v. Arthur Anderson LLP (2008) 44 Cal.4th 937, in which the Court held that noncompete agreements are void under section 16600 of the California Business and Professions Code no matter how narrowly tailored they are. Id. at 955. AB 1076 will also require employers to notify all employees who were employed after January 1, 2022, in writing by February 14, 2024, that any noncompete agreements they may have signed are void. AB 1076 will be reflected in an amended section 16600 of the California Business and Professions Code and will go into effect on January 1, 2024.
§ 9.1.10 Tenth Circuit
The Tenth Circuit has not seen any new laws within the last year impacting trade secrets or related claims. However, courts in the Tenth Circuit added to current jurisprudence: Goode v. Zavodnick, No. 120CV00742DDDKLM, 2023 WL 3568126 (D. Colo. Feb. 17, 2023). Here, plaintiff voluntarily shared dream journal records with defendant, knowing that the defendant would share the records with others, and without knowing they possibly constituted a trade secret. Plaintiff later alleged that defendant misappropriated her dream journal records and on that basis, filed a claim for federal and state trade secrets claims. However, those claims were dismissed because she did not sufficiently allege that she took reasonable measures to maintain the secrecy of her dream journal records. Plaintiff attempted to argue that she did not know her dream journal records were trade secrets until it was too late—when she realized her records constituted legitimate dream research. In dismissing plaintiff’s claims, the court held that trade secret protection is not retroactive, and on that basis, dismissed her claims.
Cayo, Inc. v. Swiss Reinsurance Am. Corp., No. 23-CV-00105-MEH, 2023 WL 4744196, at *14 (D. Colo. May 2, 2023). Plaintiff developed “one of the first web-based ‘instant-issue’ life insurance platforms in the country”—“the ‘Instalife’ platform (the ‘Platform’).” Its “Platform provided a safe and secure way for partnering insurance companies to provide life insurance policies directly to qualified applicants with competitively-priced [sic] premiums that could be approved instantly online.” Plaintiff partnered with defendant to optimize the website and its services in order to generate more business. The relationship did not last, and defendant attempted to terminate the agreement. Plaintiff accused the defendant of creating its own website with a very similar platform for the issuance of life insurance policies as plaintiff’s website.
Plaintiff alleged multiple causes of action, including a claim for violation of Colorado’s Uniform Trade Secrets Act (“CUTSA”). The Court dismissed the claim, finding that plaintiff failed to establish that it possessed a valid trade secret. The Court acknowledged that Colorado does not have a heightened pleading standard for misappropriation of trade secrets claims. Even then, the Court found that plaintiffs’ allegation that it provided defendant “access to [the website’s] confidential and proprietary intellectual property, including the coding, design and processes” was insufficient, as it did not provide sufficient factual basis to establish what the confidential and proprietary intellectual property actually were. The Court further found that plaintiff had not plead sufficient facts establishing that it made reasonable efforts to maintain the secrecy of its trade secrets. Plaintiff stated that “took steps to conceal its intellectual property from persons and entities other than Defendants,” but the Court found it lacks any factual support. In sum, even though Colorado has a lower pleading requirement for its Uniform Trade Secrets Act, plaintiffs are still required to set forth facts sufficient to establish each element.
§ 9.1.11 Eleventh Circuit
The Eleventh Circuit has seen various cases that further impact restrictive covenants and other provisions in agreements among parties. For instance, in American Plumbing Professionals, Inc. v. ServeStar, LLC, 2022 WL 628664 (March 4, 2022), a plumbing company filed suit against its former employees and a competing plumbing company, claiming that the individuals were violating their noncompetes and that the competitor had engaged in tortious interference by inducing the individuals to violate their noncompetes. The noncompetes included a geographic restriction for the territory where the employees provided services on behalf of the employer during the last twelve months of their employment. The agreement also included an acknowledgement that “territory” where the employees provided services extended to parts of the United States where the employer transacts business, in light of the company-wide nature of the confidential information and business relationships developed and maintained by the employees. The trial court granted summary judgment to the new employer on the tortious interference claim based on its finding that the vague and defective territory in the noncompetes rendered them unenforceable. The appellate court reasoned that under Georgia’s Restrictive Covenant Act (RCA), a geographic restriction can be enforced even if the employee cannot determine its maximum reasonable scope until the end of his or her employment. The Court found that the geographic restriction in the noncompetes complied with the language that it specifically sanctioned by the RCA and gave the employees fair notice of the maximum reasonable scope of their restraints. This continues to make clear that Georgia trial courts should follow the parameters of Georgia’s RCA when determining whether noncompetes are valid or enforceable.
Another example is North American Senior Benefits, LLC v. Wimmer, 2023 WL 3963931 (Ga. App. June 13, 2023), where two insurance agents left their employer and started a competing business. The court found that two insurance agents’ restrictive covenants, which included employee non-recruitment covenants, were invalid. In the first Georgia appellate decision on this issue of whether a territory was required for this type of restrictive covenant, the Georgia Court of Appeals agreed, holding that non-recruitment and no-hire covenants must have a territory to be enforceable under Georgia law. On the other hand, Georgia’s statute expressly states that customer nonsolicits and nondisclosure covenants are not required to have a geographic scope. The Georgia Court of Appeals also held that courts can “blue-pencil” overbroad covenants by striking offending language, but cannot write in terms where none exist (e.g., courts cannot write in a territory in the agreement where no territory is present). Employers should review and revise restrictive covenant agreements to avoid challenges to the enforceability of an employee nonsolicit and consider whether this means that other restrictive covenants, such as referral source, vendor, and supplier nonsolicits, may also require a territory to be enforceable.
Another case to note is the Eleventh Circuit’s opinion in SIS LLC v. Stoneridge Software Inc. et al., Case Number 21-13567 (11th Cir. 2023), where the Eleventh Circuit upheld the trial court’s rejection of liquidated damages in a trade secret case. This case involved two technology companies who had previously attempted to work together and entered into a confidentiality agreement. The party alleged that defendant had breached the parties’ confidentiality agreement and filed suit to recover damages based solely on the liquidated damages provision in the confidentiality agreement. The Eleventh Circuit, in declining to enforce the liquidated damages provision, reasoned that the formula used for the liquidated damages provision was “not a reasonable method for approximating the probable loss because it is based entirely on the breaching party’s profits, and not on the injury suffered by the non-breaching party.” The Eleventh Circuit concluded that this amounted to an improper penalty under Georgia law and is unenforceable. Employers should review their liquidated damages provisions to ensure it will hold up in a trade secrets dispute.
§ 9.1.12 DC Circuit
2023 was a quiet year for employee mobility opinions in the Washington D.C. area courts. There were no published cases applying or interpreting Washington D.C.’s scaled back noncompete ban. However, the District’s federal court issued a handful of notable opinions on issues that frequently arise in trade secret and customer nonsolicit litigation.
Clevinger v. Advocacy Holdings, Inc., 2023 U.S. Dist. Lexis 121860 (D.D.C. July 15, 2023) provides a thorough analysis of a cornerstone element of injunctive relief—irreparable harm. There, Advocacy’s former CEO resigned to join a competing company and took its customer contact information. Clevinger allegedly then solicited Advocacy’s customers and told some of its customers that Advocacy was “closing” or “pivoting” away from its existing business. Advocacy sought a preliminary injunction to enforce Clevinger’s twelve-month customer nonsolicit agreement. Despite observing that the allegations may represent “stunning breaches” of Clevinger’s fiduciary and contractual obligations, the court denied Advocacy’s motion based on an absence of irreparable harm. The court appeared most persuaded by the fact that Advocacy was able to calculate its damages, and that its business was “about the same” and is “not going out of business anytime soon.”
In Meyer Grp v. Rayborn, 2023 BL 387314 (D.D.C. Sept. 23, 2023) the district court summarily adjudicated several issues that are frequently litigated in cases arising from theft of a customer list. When Rayborn left real commercial restate brokerage Meyer Group, he took handwritten index cards containing customer information. On Meyer’s motion for summary judgment, the court found that Rayborn breached his contractual confidently obligations to Meyer. While the court left the issue of trade secret misappropriation to the jury, it found that the cards were trade secrets. In doing so, the court rejected Rayborn’s argument that some of the cards’ information was readily accessible on the Internet and subscription databases. Key to the court’s decision were its findings that it was not dispositive if “some of the information” written on the cards was publicly available; that lease expiration dates, key contact information, and notes about client preferences were on the cards; and even if individual cards were not trade secrets, a jury could find that the collection of cards gave Meyer Group a “significant competitive advantage” in the real estate market.
When trade secret misappropriation occurs outside of a plaintiff’s view, courts will often decide if the complaint alleges sufficient circumstantial evidence to create an inference of misappropriation. In Aristotle Int’l v. Acuant, Inc., 2023 WL 1469038 (D.D.C. Jan. 4, 2023), Aristotle alleged that its reseller, Acuant, disclosed its trade secrets to a third party, GB Group, during M&A due diligence. In denying Acuant’s motion to dismiss, the court found that Aristotle alleged sufficient circumstantial evidence to plausibly allege the existence of a trade secret and misappropriation. Key to the court’s finding were the complaint’s allegations that Acuant was acquired by GB group three months before Acuant received the alleged trade secret information from Aristotle, and that GB Group quoted from the confidential reseller contract between Aristotle and Acuant. The court declined to require allegations showing direct proof of misappropriation.
