Category Archives: Non-Competition and Confidentiality

Congress Passes Federal Trade Secret Legislation

Sometimes it snows in April, and sometimes – but not too frequently – Congress is actually able to pass legislation that will become law.  This happened recently when the House passed the Defend Trade Secrets Act of 2016 on April 27, 2016.  It is expected that President Obama will sign the bill into law.  Here’s what employers need to know about the new law:

Federal Cause of Action:  The law will create a federal cause of action for the owner of a trade secret to bring a claim for misappropriation under federal law and in federal court, so long as the trade secret is “related to a product or service used in, or intended for use in, interstate or foreign commerce.”  Until now, trade secrets were governed only by state law.

Relief Available:  The law allows a party to seek injunctive relief and damages for misappropriation of trade secrets, including exemplary damages equal to 2 times the amount of actual damages caused by the misappropriation.

Seizure of Property:  The law creates a procedure for the party asserting a trade secret claim to request that the court order “the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”  To obtain this relief, the court must hold a hearing, and the plaintiff must demonstrate that a temporary restraining order or injunction would be inadequate to prevent irreparable harm, among other things.  If granted, the seized property will be taken into the custody of the court.  In some cases, a special master may be appointed to locate and isolate all misappropriated trade secrets and to facilitate their return to the owner.

Statute of Limitations:  The statute of limitations for claims under the new law will be 3 years after the date on which the misappropriation is discovered or should have been discovered.

Effective Date:  The new law will not apply retroactively.  Instead, it will only apply to acts that occur on or after the date of enactment.

No Preemption:  The new law provides that it does not preempt other laws.  As a result, state laws concerning the protection of trade secrets will remain in effect, and trade secret owners may have claims under both federal and state law when misappropriation occurs.

Takeaway:  The Defend Trade Secrets Act of 2016 will create a federal cause of action for misappropriation of trade secrets and will give rise to a new federal body of law concerning trade secrets.

Is Continued Employment Sufficient Consideration For a Noncompete Agreement in Wisconsin?

Yes, the Wisconsin Supreme Court recently held that continued at-will employment is sufficient consideration for a noncompete agreement.

In Runzheimer International, Ltd., v. David Friedlen and Corporate Reimbursement Services, Inc., the Wisconsin Supreme Court resolved an issue that was previously unclear under Wisconsin law.  2015 WI 45 (Wis. Apr. 30, 2015).  The key holding of the case is that:

[A]n employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant.

The court based this holding on the doctrine of at-will employment, reasoning that the employer was giving up its right to terminate the employee immediately in exchange for the noncompete.  The court noted that, theoretically, an employer could terminate the employee moments after the employee signs the noncompete.  However, the court explained that the employee would be protected in that circumstance by other legal doctrines, including fraudulent inducement or good faith and fair dealing, which could be used to invalidate the noncompete.

The Runzheimer decision presents a contrast with Minnesota law.  In Minnesota, a noncompete must be signed at the inception of the employment relationship.  If the employment has already started, independent consideration, such as a bonus or a promotion, is required.  See Sanborn Manufacturing Co. v. Currie, 500 N.W.2d 161 (Minn. Ct. App. 1993).

Takeaway:  Continued at-will employment is sufficient consideration to support a noncompete agreement for an existing employee in Wisconsin.

Why You Wanna Treat Me So Bad? – Prince Gets Sued For Tortious Interference With Contract

A new lawsuit in New York challenges Prince’s classic lyric in Purple Rain that “Baby I could never steal you from another.”

According to the lawsuit, Prince recently recorded, produced, and released a new album for free from his protégé, former Voice contestant Judith Hill.  But controversy arrived faster than a little red corvette.  A few days after the album’s release, a producer who previously signed Hill to Sony’s label sued Prince for tortious interference.  The lawsuit alleges that Hill was warned not to record with Prince multiple times, but did it anyway.  Notably, Hill has filed her own lawsuit and is asking the court to declare that she has no contractual obligations to the producer.

At this point it’s unclear whether Prince sought legal advice before recording and releasing Hill’s album.  If he did, he would arguably be able to raise advice-of-counsel as a defense.

Takeaway:  The Prince litigation is a sign o’ the times.  Hiring an employee – or a protégé in Prince’s case – who is subject to contractual restrictions, such as a non-compete agreement, always carries some risk.  If u don’t want 2 get sued, it’s best to do your due diligence and consult with legal counsel prior to making the hire.

When Is Advice of Counsel A Valid Defense To A Claim For Tortious Interference?

The Minnesota Supreme Court recently published a decision that clarifies when advice of counsel can provide a defense to a claim for tortious interference with contract.

In Sysdyne Corp. v. Rousslang et al., Sysdyne sued a company named Xigent Solutions, LLC for hiring a former employee who was subject to a noncompete agreement. No. A13-0898 (Minn., Mar. 4, 2015). Although Sysdyne prevailed on its claim for breach of contract against the former employee, the trial court held that Xigent was not liable for tortious interference because its actions were justified based on its reliance on advice of legal counsel. Sysdyne appealed and argued that the justification defense cannot be satisfied by a defendant’s honest but erroneous belief, based on the advice of counsel, that a contract is unenforceable.

The Minnesota Supreme Court affirmed the lower court’s decision that Xigent was not liable for tortious interference. The Court emphasized that any reliance on advice of counsel with respect to a noncompete agreement must be reasonable under the circumstances to provide a defense. The Court affirmed the trial court’s decision that Xigent’s actions were reasonable because Xigent provided its attorney with the noncompete agreement and the employee’s original offer letter from Sysdyne, informed its attorney that the employee would be doing the same work for Xigent, and consulted with the attorney regarding the enforceability of the noncompete.

The Court explained that the focus of the analysis is on whether the defendant’s consultation with legal counsel is reasonable, not whether the attorney’s legal analysis was reasonable. The Court also held that the attorney’s advice may be verbal and does not necessarily need to be written.

Takeaway: Reasonable reliance on advice of counsel may provide a defense to claims of tortious interference with contract based on hiring a competitor’s employee who is subject to a noncompete. Although written advice is not absolutely necessary, it may be helpful from an evidentiary standpoint in proving the defense. It is also important to remember that relying on advice of counsel may waive attorney-client privilege with respect to the advice in question and will not necessarily protect the employee from liability for breach of contract.

Ten Ways To Maintain the Secrecy of Trade Secrets

One of the requirements for information to qualify as a trade secret is that the information must be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Here are ten ways that employers can maintain the secrecy of trade secrets:

  1. Physical Protections: Keep trade secrets in a locked room, cabinet, or vault. Employers can also use access rights (like key cards) to restrict who has physical access to the trade secret information, or they can maintain a log of individuals who had access to it and when.
  2. Digital Protections: When trade secret information is stored digitally, user accounts and passwords can be used to control who has access to the information. If the information is transmitted via email or download, consider using encryption to prevent unauthorized disclosures.
  3. Label Information as “Confidential.” Although not absolutely necessary, including a label on any documents or information to make clear that it is “Confidential” is helpful.
  4. Destroy Old Documents or Data. Trade secret information should not be placed in publicly accessible dumpsters or recycling bins in readable form. Instead, shred it before disposal. If trade secret information is stored on a computer or hard-drive, the computer or hard-drive should be wipe-cleaned or rendered inaccessible before disposal, too.
  5. Confidentiality Agreements: Require employees who have access to trade secrets to sign confidentiality agreements. Confidentiality agreements should clearly define what information may not be disclosed and should authorize the employer to seek injunctive relief and damages in the result of a breach.
  6. Non-Disclosure Agreements: For vendors or other third-parties who may have access to trade secrets, an employer can require the outside party to sign a non-disclosure agreement. Like a confidentiality agreement for employees, a non-disclosure agreement should clearly define what information is protected and authorize injunctive relief and damages in the event of a violation.
  7. Require Departing Employees To Return Company Property. Employees who terminate their employment with the company should not be permitted to take company data with them. Instead, employment policies or agreements should clearly inform employees that all company data, whether in digital or hard-copy format, must be returned upon termination.
  8. Monitor Employee Emails or File Transfers. Employees should not be permitted to email trade secret data to third-parties or personal email accounts or to copy trade secrets to external devices without authorization. Periodically monitoring employee emails, either using software to detect key terms or via manual monitoring, is one way to detect unauthorized disclosures.  Software is also available that can alert employers when files are copied to external devices.
  9. Don’t Get a Patent. Getting patent protection for an invention requires publicly disclosing how it works. If the protections of trade secret law are more valuable to a company than the limited monopoly provided by a patent, don’t get a patent.
  10. Set a Good Example. If employers want employees to protect the confidentiality of trade secrets, then the leaders and supervisors in the company should set a good example for the employees. If the leaders of the company are careless with trade secrets, the employees will likely be careless, too.

Takeaway: For trade secret protection to apply, an employer must use reasonable efforts to maintain the information’s secrecy. What is reasonable for a particular employer will vary depending on the information protected as well as the nature of the business and the workforce.

When Are Non-Compete Agreements Enforceable In Minnesota?

Non-compete agreements are enforceable in Minnesota when the restrictions are reasonably necessary to protect the employer’s legitimate interests, such as the company’s goodwill, trade secrets, or confidential information.

Whether the restrictions in a non-compete agreement are reasonable depends on the nature and extent of the business, the nature and extent of the service of the employee, and other pertinent conditions. Two factors that courts often focus on when determining reasonableness are: (1) geographic scope; and (2) duration.

Geographic Scope: Whether the geographic scope of a non-compete is reasonable depends on what is necessary to protect the employer from unfair competition. For example, if an employee makes sales statewide, a statewide non-compete may be reasonable. Alternatively, a worldwide non-compete may be reasonable if the employer operates globally and the employee has access to confidential information that could be used to compete anywhere. See, e.g., Medtronic, Inc. v. Hughes, 2011 WL 134973 (Minn. Ct. App. 2011) (enforcing worldwide, product-specific non-compete).

Duration: Whether the duration of a non-compete is reasonable also depends on what is necessary to protect the employer from unfair competition. Factors that courts may consider in making this determination include: (1) the length of time necessary to obliterate the identification between the employer and employee in the minds of the employer’s customers; or (2) the length of time necessary for an employee’s replacement to obtain licenses and learn the fundamentals of the business. For employees, one-year non-competes are often enforced, but two-year non-competes may also be reasonable, depending on the circumstances. See, e.g., Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438 (Minn. Ct. App. 2001) (upholding enforcement of two-year non-compete).  Longer non-competes may be enforceable in the context of the sale of a business.

Takeaway: Non-competes will generally be easier to enforce when tailored to protect the employer’s legitimate interests with respect to both geography and duration.

How To Protect An Employer’s Intellectual Property

There are a variety of options that employers can use to protect against employee misuse of their intellectual property.  Some of them automatically apply to employees as a matter of law, but others need to be negotiated as a matter of contract.  In addition to the protections available under patent and trademark law, here are some of the options available to employers to prevent employee misuse of intellectual property:

  • Trade Secret Law: Trade secret law protects information that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.  Although employees do not need to be expressly informed that information is a trade secret for the law to apply, it is best to identify information as confidential either by marking documents as confidential, using a confidentiality policy or agreement or otherwise.
  • Duty of Loyalty: The duty of loyalty is a common law rule that prohibits employees from gaining a personal benefit at their employer’s expense.  Duty of loyalty claims typically arise when an employee solicits an employer’s customers for him or herself or for a competitor or otherwise competes against the employer while still employed – for example, by misusing an employer’s confidential intellectual property.
  • Non-Compete Agreements: Non-compete agreements prohibit an employee from competing against an employer for a period of time after termination of employment.  If the employee gains access to the employer’s confidential data, this can help prevent disclosure of the data to a competitor while the information is still fresh in his or her mind.  Non-compete laws vary from state-to-state, so it is important to make sure non-compete agreements comply with all applicable requirements.
  • Confidentiality Policies and Agreements: Confidentiality provisions in employment policies or handbooks help inform employees about what kinds of information needs to kept confidential.  They are most effective when they are tailored to the particular nature of the employer’s business.  In the event of a violation, the provision can be used to either support a trade secret misappropriation claim or a breach of contract claim.  However, employers need to be careful not to make confidentiality policies too broad – for example, by trying to prohibit employees from disclosing their wages.
  • Assignment of Invention Policies or Agreements: Assignment of invention provisions in employment policies or agreements require employees to assign ownership in any inventions they develop while working for the employer to the employer.  This will prevent an employee from later claiming ownership in work product prepared for the employer.
  • Work-For-Hire Policies or Agreements: Under federal copyright law, “works made for hire” are presumptively owned by the person or company for whom the work was prepared.  17 U.S.C. § 201.  This means that an employer presumptively owns any work prepared by an employee that is subject to U.S. copyright laws.  Although this is a legal presumption, it can be helpful to have explicit policies or agreements on this subject for employees who focus their efforts on creating copyrightable materials.

Takeaway:  There a variety of methods that employers can use to protect their intellectual property.  What methods work best for an employer will vary depending on the nature of the employer’s business and workforce.

Noncompetes for Existing Employees in Minnesota and Wisconsin

Employees are often asked to sign a noncompete agreement as part of the hiring process. In that circumstance, the consideration offered by the employer to make the agreement enforceable is generally the job itself. But the job itself may not be sufficient for existing employees.

Occasionally, employers will present an existing employee with a noncompete agreement for signature. In that situation, Minnesota courts have made clear that the employer must offer an existing employee more than continuing at-will employment to make the agreement enforceable. See Sanborn Manufacturing Co. v. Currie, 500 N.W.2d 161 (Minn. Ct. App. 1993)(“Proof of continued employment is not enough to show sufficient consideration for a noncompetition agreement.”). Many times the required additional consideration will take the form of a one-time monetary payment.

In Wisconsin, the Court of Appeals recently asked the Wisconsin Supreme Court to decide this same issue. In Runzheimer International, Ltd. v. Friedlen, the following issue was certified to the Wisconsin Supreme Court for determination: “Is consideration in addition to continued employment required to support a covenant not to compete entered into by an existing at-will employee?” Appeal No. 2013AP1392 (Wis. Ct. App., Apr. 15, 2014).

Friedlen was employed by Runzheimer for nearly 20 years when he was asked to and did sign a noncompete agreement. The agreement was a condition of his continued employment and his continued participation in the annual incentive plan. The Court of Appeals found that the agreement only provided Friedlen the opportunity to remain employed. Having later been terminated, Friedlen took a job with a competitor in violation of his agreement. Runzheimer then sued him to enforce the agreement. Now the Wisconsin Supreme Court will determined whether the agreement is enforceable.

Takeaway: Employers should be aware that enforcement of noncompetition agreements is determined on a state-by-state basis. If in doubt regarding the restrictive covenant laws in a particular state, it is a good idea to consult with legal counsel.

Minnesota Court Declines to “Blue-Pencil” Noncompete Agreement

The Minnesota Federal District Court recently reviewed an employee’s noncompete agreement and determined its terms were unenforceably vague and over broad.  See Gavaras v. Greenspring Media, LLC, et. al., Civil No. 13-3566 (D. Minn., Jan. 13, 2014).  The terms of the seventeen year old agreement (the company had been sold twice since that time) were conditioned on compliance with the terms of a written employment agreement, which the court found was never clearly defined or executed.  At best, the company relied on a proposal setting forth possible benefits rather than certain employment terms.  Further, the court found the agreement lacked a geographic limitation and left “the employee guessing” as to the scope of the noncompete.

The company urged the court to exercise its discretion to “blue-pencil” or edit the agreement to make its terms reasonable and enforceable.  See Bess v. Bothman, 257 N.W.2d 791 (Minn. 1977).  The court refused, however, to do so and stated:  “Modifying this agreement would require more than modifying the duration and territorial scope.  The Court would need to rewrite the agreement wholesale, and rewriting would require the Court to divine the parties’ intent at the time of contracting, seventeen years after the fact, and with a different employer.”

Takeaway:  Minnesota employers should make sure any noncompete agreement it uses is drafted to contain reasonable and articulate terms.  While a court has the inherent authority to blue-pencil overbroad terms, it will not do so if such modification requires the court to comprehensively rewrite the agreement.  Further, successor employers should conduct due diligence on existing employee noncompete agreements and, where appropriate, update or amend the terms of such agreements to enhance enforceability.

Potential Legislation Continues to Threaten Non-Competes in Minnesota

Last February, Representative Joe Atkins introduced a bill, HF 506, which, if passed, would prohibit noncompete agreements in Minnesota.  This bill was recently the subject of discussion at a Minnesota House Commerce  and Consumer Protection Finance and Policy committee hearing on August 29, 2013.  Currently, California and North Dakota are the only other two states that impose similar onerous restrictions on non-compete agreements for employees.

There is a significant body of non-compete case law established in Minnesota, including over 100 cases at the MN Supreme Court level.  Courts have narrowly defined what will be allowed in non-competes, and Minnesota judges will rewrite or “blue pencil” these agreements if they consider them too restrictive.

Under the current law in Minnesota, an employer cannot seek to enforce a non-compete that is more than necessary to serve the legitimate interests of the company.  Non-competes must legitimately protect either goodwill or confidential information.  As for the scope of non-competes, a reasonable time is typically one to two years.  Currently, many employers utilize no geographic restrictions because, in the high-tech fields, companies operate and compete worldwide.  Most non-competes are intended to protect the companies’ products or customers.

Companies that are headquartered in Minnesota are drafting non-competes to be governed by Minnesota law for all their employees worldwide.  Using Minnesota law gives companies the ability to have a uniform set of laws.  A change in the law would be a significant change to those industries that mentor and provide professional development through their investments in their employees.  States governed by statutes on this issue (California, Texas, Georgia) are arguably no better than states governed by case law like Minnesota, since it takes years to litigate what the Legislature meant by their statutes.  Minnesota case law is relatively clear on this issue – and if the Legislature adopts a statute instead, there could be years of uncertainty while it is being litigated.

Takeaway:  Employers that utilize non-compete agreements in Minnesota should continue to monitor this potential legislation.  Employers with strong opinions on this issue – either in support or against – should consider contacting their local representatives.

Are Confidentiality Provisions in Severance Agreements Enforceable?

Many employers use severance agreements containing confidentiality provisions, but worry about how enforceable such provisions are.  According to a recent case, they are very enforceable.

The case of Hallmark Cards, Inc. v. Murley, 703 F.3d 456 (8th Cir. 2013), will be very helpful to employers seeking to enforce such confidentiality provisions.  In Hallmark Cards, the employer sued its former vice president of marketing, who received a severance package of $735,000 after her position was eliminated due to a corporate restructuring.  The jury found that the former employee had breached the confidentiality provision of the severance agreement by disclosing Hallmark’s confidential information to her new employer, a competitor.  The jury awarded Hallmark Cards the full value of the severance package and the employee’s compensation paid by her new employer.  The former employee appealed.

On appeal, the former employee argued that she had complied with some provisions of the severance agreement and therefore she should not have to pay back the full severance amount.  The former employee also argued her former employer was not entitled to any of her compensation from her new employer.

Hallmark argued that it was entitled to the full amount of damages awarded because the only reason the new employer paid her compensation was because she provided the new employer with Hallmark’s confidential information.

The Eighth Circuit Court of Appeals upheld the jury’s award of a full refund to Hallmark of its $735,000 severance payment, but held Hallmark was not entitled to the award of the former employee’s compensation from her new employer.  The court rejected the former employee’s argument that Hallmark got some value for the severance agreement and thus was not entitled to get all of its severance payment back.  The Eighth Circuit reasoned that the confidentiality provision was the primary purpose of the agreement and that the language of the agreement clearly indicated that preserving confidentiality was a priority.

The Eighth Circuit held, however, that Hallmark was not entitled to be put in a better position than it would have been in if the former employee had not breached the severance agreement.  Accordingly, Hallmark was not entitled to the former employee’s compensation from her new employer.

Takeaway:  The Hallmark Cards case shows employers can enforce properly drafted confidentiality agreements in severance agreements.  To have the best chance for success, employers should have their attorneys draft or review the confidentiality provisions prior to giving the severance agreement to the employee, and then call their attorneys if they obtain evidence that a former employee has breached the confidentiality provision.

Can Employers Require Assignment of Employee Inventions Under Minnesota Law?

Yes – employers can require assignment of employee inventions under Minnesota law, but there are important statutory limitations on that right that employers need to know.  Minnesota law provides that any assignment in the ownership rights of employee inventions may not apply to:

[A]n invention for which no equipment, supplies, facility or trade secret information of the employer was used and which was developed entirely on the employee’s own time, and (1) which does not relate (a) directly to the business of the employer or (b) to the employer’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the employee for the employer.

Minn. Stat. § 181.78.  The statute further provides that any agreement for assignment of invention rights that purports to apply to inventions that meet the criteria listed above is “void and unenforceable.”

In addition, if an employment agreement contains a provision requiring the employee to assign or offer to assign any of the employee’s rights in any invention to an employer, the employer must, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to inventions that meet the criteria listed above.

Takeaways:  Employers who require assignment of employee inventions should:  (1) make sure that their agreements relating to the assignment of inventions comply with the statutory exclusions created by Minnesota law: and (2) make sure to provide the written notification required by the statute for employees who are subject to assignment agreements.