On May 7, 2015, Barbara Harris of Practical Law along with Peter A. Steinmeyer and Robert D. Goldstein of Epstein Becker & Green, P.C. presented a webinar on recent developments and expected trends in the evolving legal landscape of trade secrets and employee non-competition agreements. Although this area depends heavily on state law, courts in a variety of jurisdictions are revisiting significant issues in non-compete enforcement and interpretation. This resource summarizes important takeaways from the webinar presentation.

Courts are taking a second look at what constitutes adequate consideration for non-compete agreements. For example, in Illinois, it was settled law for 30 years that new employment was sufficient consideration regardless of the duration of employment. However, in Fifield v. Premier Dealer Services, Inc., the Illinois Supreme Court held that an offer of employment alone is not sufficient consideration (993 N.E.2d 938, 943 (Ill. App. Ct. 2013)). Instead, two years of employment are required for adequate consideration.

Illinois courts have been inconsistent in their adherence to the Fifield rule, but the case represents a dramatic shift from previously settled law (see Legal Update, Epstein Becker: Illinois Appellate Court Provides Guidance on At-will Employment as Non-compete Consideration). Other jurisdictions, such as Kentucky, Pennsylvania and Wisconsin, are assessing similar questions. Employers should give serious thought to extending consideration beyond an offer of or continued employment (for example, financial incentives or promotions) to support non-compete agreements.

In some jurisdictions, it is common practice to seek a declaratory judgment on whether a non-compete is enforceable, even in the absence of contractually prohibited conduct. Another recent Illinois case suggests that the standard in federal court for declaratory relief may stricter than in state court. In Brunner v. Liautaud & Jimmy John's, LLC, the court held that because defendants disclaimed their intent to enforce the non-compete and the plaintiffs never alleged with adequate specificity that they were preparing to violate their non-compete, the case was not judiciable (No. 14-C-5509, (N.D. Ill. Apr. 8, 2015)). Employers in Illinois and beyond may see this stricter standard applied in federal court for declaratory judgment. Regardless of the jurisdiction, narrowing the scope of demand letters may help employers achieve a more favorable outcome.

It is common practice to include a provision in settlement and separation agreements that the departing or former employee cannot work for that same employer in the future. At least in California, under California Business & Professions Code Section 16600, there is an ongoing challenge to that assumption. In Golden v. California Emergency Physicians Medical Group, a physician challenged a "no future employment clause" that would have prohibited him from working with a large medical consortium (782 F.3d 1083 (9th Cir. 2015)). The case is now being considered on remand, but it is noteworthy that any court would frame these common clauses as unauthorized restraints on trade. Although it is too soon to abolish these kinds of provisions entirely, it is a case worth watching.

When the company that makes Emmy Awards was sued for violation of a commercial non-compete for supplying its iconic award to a third party, it argued that the non-compete was unenforceable because it was not supported by a legitimate business interest. In Owens Trophies, Inc. v. Bluestone Designs & Creations, Inc., the court rejected that argument, holding that the analysis of a commercial non-compete is distinct from that of an employment non-compete because there is no imbalance of power (No. 12 C 7670, (N.D. Ill. Jan. 14, 2014)). Parties entering into commercial non-competes should not assume the analysis is identical to an employment non-compete.

Is it a violation of a duty of loyalty to contact customers and suppliers and ask their opinions of your forming a new, competitive business? According to the Illinois Appellate Court, the answer depends on whether you are an employee or a corporate officer. In Xylem Dewatering Solutions, Inc. v. Szablewski, the court held that ordinary employees may plan and outfit a competitive company as long as they do not actually begin competing (2014 IL App (5th) 140080-U (Sept. 8, 2014)). A corporate officer, however, cannot actively exploit that position for personal benefit and cannot hinder the corporation's ability to continue its business. Employers considering duty of loyalty litigation should note that a court may draw this distinction.

The Federal Rules of Civil Procedure are authorize injunction bonds in "an amount that the court considers proper" (FRCP 65(c)). State courts differ in their own interpretation of proper injunction bonds, but they may be increasingly inclined to recognize challenges to the amount of the bond. For example, in Moss v. Progressive Design Apparel, Inc., the Indiana Court of Appeals strictly interpreted state procedural law, noting that the bond should approximate the damage the enjoined party will suffer if the injunction was wrongfully entered, and reversed a token injunction bond of only $100 (No. 49A05-1401-PL-3, (Ind. Ct. App. Sept. 10, 2014)). Attorneys should be prepared to give a fuller assessment of the adequacy of injunction bonds.

Congress has trade secrets on the federal legislative agenda. The Defend Trade Secrets Act of 2014 (S. 2267) and the Trade Secrets Protection Act (H.R. 5233) have been introduced by the Senate and House of Representatives, respectively. Although neither bill made it out of committee before the 2014 session ended, either could be revisited in the next legislative session. There is growing consensus that the Computer Fraud and Abuse Act is an insufficient federal remedy for employment-related trade secret violations. States are considering laws both limiting non-compete enforcement (New York, Massachusetts, Washington and Michigan) and strengthening it (Wisconsin). Employers should keep abreast of these potentially game-changing legislative developments in the future.

The Securities and Exchange Commission, National Labor Relations Board and Equal Employment Opportunity Commission are all increasingly scrutinizing confidentiality agreements with an eye toward whether they prohibit whistleblowing and other protected activity. Employers should include in confidentiality agreements a clear statement that confidentiality agreements and policies do not limit employees' rights to communicate with a governmental agency.

Choice of law and forum selection clauses in non-competes are powerful tools that may dictate the outcome of a non-compete dispute. However, even in jurisdictions where non-competes are generally favored, if there is an insufficient nexus with the choice of law state, courts may not enforce them. For example, in Ascension Insurance Holdings, LLC v. Underwood, a court in non-compete-friendly Delaware held that a non-compete executed by a California resident involving a California geographic limitation with a company whose principal place of business was California could not enforce a Delaware choice of law provision (No. CV 9897-VCG, (Del. Ch. Jan. 28, 2015)). Even if the court finds a reasonable relationship between the agreement and the choice of law, that provision is not guaranteed to withstand scrutiny. For example, in Brown & Brown v. Johnson, a New York employee, New York employer and Florida parent company entered into a restrictive covenant with Florida law designated as the choice of law (980 N.Y.S.2d 631 (2014)). The court declined to enforce the agreement because applying Florida law was contrary to New York public policy.

Courts are likewise taking note of forum selection clauses. For example, in Baanyan Software Services, Inc. v. Kuncha, a New Jersey court evaluating a non-compete with no forum selection clause determined that it had no personal jurisdiction over the defendant. Despite the employer's New Jersey headquarters, the defendant was an Illinois resident who never actually worked in or visited New Jersey, did not perform work for New Jersey clients, made contacts about hiring in California and allegedly breached the contract in Illinois (81 A.3d 672 (N.J. Super. Ct. App. Div. 2013)). Employers should think carefully about choice of law and forum selection clauses, and their connection to the parties and activities involved, when drafting non-compete agreements.

Although non-competes have been enforced without any geographic limitation, this kind of global restriction must be balanced against the reasonableness of the remainder of the agreement. In NanoMech, Inc. v. Suresh, the defendant executed a worldwide non-compete with no geographic restriction (777 F.3d 1020 (8th Cir. 2015)). The court held that the non-compete was overbroad not only because it lacked any geographic limitation, but it did not limit the types of activities that could be performed and was not customer-specific. This case serves as a reminder of the need to be attuned not only to the reasonableness of a non-compete duration, but also the geography and scope of activities covered.

Employers seeking to enforce non-competes may choose to send cease and desist letters to the new competitor with whom the employee has gone to work. When the letter results in an adverse employment action, the former employee may seek redress in the form of a tortious interference claim. Courts may find that the letter was a result of a legitimate business interest (see Bonds v. Philips Elec. N. Am., No. 2:12-CV-10371, (E.D. Mich. Jan. 21, 2014)), but conversely, may find that the letter amounted to a tortious act (see Boudreaux v. OS Rest. Servs., L.L.C., No. CIV.A. 14-1169, (E.D. La. Jan. 23, 2015)). Employers sending cease and desist letters should refrain from gratuitous or disparaging remarks to reduce the risk of running afoul of tort law.

In Jobscience, Inc v. CVPartners, Inc., the plaintiff alleged misappropriation, unfair competition, conversion and copyright infringement, but the court dismissed the first three common law claims as having been preempted by the last statutory claim (No. C 13-04519 WHA, (N.D. Cal. Jan. 9, 2014)). Unfortunately for the plaintiff, the remaining copyright claim provided limited monetary relief absent registration with the Copyright Office. Likewise, in Stolle Machinery Co., LLC v. RAM Precision Industries, the US Court of Appeals for the Sixth Circuit held that Ohio's Uniform Trade Secrets Act preempted not only a misappropriation of trade secrets claim, but also claims related to misappropriation (No. 13-4103, (6th Cir. Mar. 16, 2015)). Attorneys should watch out for intellectual property claims that may preempt common law claims based on the same facts and instead consider claims sounding in breach of loyalty or otherwise based on distinct facts. Alternatively, employers should fully understand the available remedies and potential preemptive effect of the copyright and trade secret claims before asserting them.