Both trade secrets laws and noncompete laws are the product of state law, although since May 11, 2016, there has also been a federal private right of action for trade secrets misappropriation under the Defend Trade Secrets Act of 2016. These laws are in a constant state of flux, both as a consequence of new judicial opinions and legislative initiatives. As such, no surprise, we have 50 variations of each (really 51, when you factor in DC and federal law), many of which are changing at any point in time. As of now, only 3 states (California, Oklahoma, and North Dakota) prohibit employee noncompetes altogether (see BRR’s 50-state summary chart), although that may change, as various legislatures – Congress included – have been considering a ban on employee noncompetes and significant other possible changes to existing laws. Charts reflecting the differences among how each of the 50 states handle noncompetes and trade secrets are available here (noncompetes) and here (trade secrets). Note that these charts are updated as new developments arise.
Given how hard it can be to stay on top of the recent developments in each state (as well as at the federal, not to mention international) and the absence of any aggregation of this information elsewhere, we have dedicated a separate page to the current status of developments in trade secrets laws and noncompete laws around the country.
While updates will continue regularly in our blog posts, this page is intended to serve as an ongoing resource for people to easily find all of the important developments in one place. Although the focus will be on the United States, important international developments will sometimes be included as well.
Actual changes in the laws – as opposed to bills being considered – are indicated by bolded orange dates, reflecting their adoption or effective date.
Please consider this page to be a work in progress, as the laws are ever-changing. So, please check back regularly.
Federal [Trade Secrets and Noncompetes]
On the trade secrets side, the Defend Trade Secrets Act of 2016 (commonly referred to as the “DTSA”), which would create a federal private right of action for the protection of trade secrets, has – with some amendments, including in connection with the inevitable disclosure doctrine – was reported out of the Senate Judiciary Committee at the end of January 2016. Bloomberg BNA has a terrific summary here: Senate Judiciary Committee OKs Federal Trade Secret Bill.
Testimony was taken back in December 2015, and is available here. Persons appearing to testify were: Karen Cochran, Chief Intellectual Property Counsel at E.I. DuPont de Nemours and Company, Tom Beall Vice President and Chief Intellectual Property Counsel at Corning Incorporated, James Pooley, a leading trade secrets expert, and Sharon Sandeen, Professor of Law at Hamline University School of Law. In addition, a letter was submitted in lieu of live testimony by a number of trade secrets practitioners (myself included) around the country. That letter is available here.
On April 4, 2016, the Senate voted unanimously to approve the DTSA.
On April 20, the House Judiciary Committee voted to approve the DTSA without amendment. As Reuters has reported, “The House version of the bill has more than 120 sponsors, but the House Judiciary Committee has not yet considered it and it was not clear whether it would act in coming months.”
On April 27, 2016, the United States House of Representatives joined the Senate in voting in favor of the DTSA. Not quite unanimous like the Senate, but almost, the House voted 410-2 to approve.
On May 11, 2016, President Obama signed the DTSA into law.
The DTSA “has been described as the ‘most significant expansion of federal law in intellectual property since the Lanham Act in 1946.’” See Congress May Be About to Shake Up Trade Secret Law: Is That a Good Thing?
Given that so much has been written about it, I will not repeat the details until something new develops. In the meantime, however, the House Judiciary Committee has a detailed report (here), my post (Defend Trade Secrets Act and What it Means) is here, Ben Fink’s summary of the amendments is in Federal Trade Secrets Law Takes Another Step Toward Reality, and Dennis Crouch’s What you need to know the Amended Defend Trade Secrets Act on PatentlyO.
Also on the trade secrets (encryption) side, in the spring of 2016, the Senate Intelligence Committee had been working on a bill (the Compliance with Court Orders Act of 2016) to authorize court orders requiring companies to assist the government to gain access to encrypted data. The bill received heavy criticism and ultimately died.
On the noncompete side, there were three prior bills in 2016, none of which was enacted:
A bill entitled, the “Mobility and Opportunity for Vulnerable Employees Act” (or the “MOVE Act“), that would prohibit the use of covenants not to compete (defined in the bill) for “low-wage employees,” i.e., employees earning the greater of (subject to inflation) $15 per hour or the applicable state or local minimum wage rate or $31,200 per year, but excluding any salaried employee earning (subject to inflation) more than $5,000/month for 2 consecutive months.
A bill entitled the “Limiting the Ability to Demand Detrimental Employment Restrictions Act” (the “LADDER Act”), which is virtually identical to the MOVE Act, but limits somewhat the definition of the employees that are considered low-wage employees.
A bill entitled the “Freedom for Workers to Seek Opportunity Act” (“FWSOA”). Although not having quite as catchy an acronym as the MOVE Act or the LADDER Act, FWSOA does win on creativity in that it seeks to ban the use of noncompetes for grocery store workers (only).
Effective January 1, 2016, Alabama modified its existing noncompete (and nonsolicit) law in several respects. Most significantly, the new “Restrictive Covenant Act,” Ala. Code §§ 8-1-190-197, (1) establishes a presumption that a two-year noncompete is reasonable in duration and (2) permits judicial reformation (i.e., modification or rewriting) of overbroad noncompetes. (States take one of three general approaches to overly-broad noncompetes: reformation (in which the court essentially rewrites the language to conform the law to a permissible scope); blue pencil (in which the court simply crosses out the offending language, leaving the remaining language enforceable or not); and red pencil (also referred to as the “all or nothing” approach, as its name implies, requires a court to void any restriction that is overly broad, leaving nothing to enforce.)
The new statute also makes clear that it is a fundamental policy of Alabama and that it “shall govern and shall be applied instead of any foreign laws that might otherwise be applicable in those instances when the application of those foreign laws would violate a fundamental public policy expressed in” the statute.
Arkansas noncompete law was statutorily modified in 2015 by the addition of Ark. Code 4- 70-207.
Under the new law, noncompetes in Arkansas must be limited with respect to time and scope in a manner that is not greater than necessary to defend the protectable business interest of the employer (see below). The lack of a geographic limit does not render the agreement unenforceable, provided that the time and scope limits appropriately limit the restriction. Factors to consider include the nature of the employer’s business interest; the geographic scope, including whether a geographic limit is feasible; whether the restriction is limited to specific group of customers or others; and the nature of the employer’s business. In addition, a two-year restriction is presumptively reasonable unless clearly demonstrated otherwise.
Under the new law, a court must judicially reform (i.e., modify/rewrite) overly broad noncompetes. (States take one of three general approaches to overly-broad noncompetes: reformation (in which the court essentially rewrites the language to conform the law to a permissible scope); blue pencil (in which the court simply crosses out the offending language, leaving the remaining language enforceable or not); and red pencil (also referred to as the “all or nothing” approach, as its name implies, requires a court to void any restriction that is overly broad, leaving nothing to enforce.)
Legitimate business interests that may be protected include trade secrets; intellectual property; customer lists; goodwill with customers; knowledge of business practices; methods; profit margins; costs; other confidential information (that is confidential, proprietary, and increases in value from not being known by a competitor); training and education; other valuable employer data (if provided to employee and an employer would reasonably seek to protect or safeguard from a competitor in the interest of fairness).
California [Noncompetes and Trade Secrets]
Effective January 1, 2017, California has a new law purporting to prohibit the litigation outside of California of most employment-related issues affecting California-based employees. Although not specifically focused on noncompete agreements or nondisclosure agreements, the law would cover such agreements. Specifically, the new law, added as section 925 to California’s Labor Code, provides:
925. (a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:
(1) Require the employee to adjudicate outside of California a claim arising in California.
(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
(b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.
(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees.
(d) For purposes of this section, adjudication includes litigation and arbitration.
(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.
(f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.
On April 27, 2016, the Connecticut Senate passed a bill (S.B. No. 351) to restrict the duration, geographic reach, and scope of physician noncompetes. The vote was 35-1. The bill has progressed to the House and then, following various amendments, was passed by both the House and Senate. See Connecticut General Assembly bill tracker.
In sum, the new law – applicable only to noncompetes entered into on or after July 1, 2016 – limits physician noncompetes to one year in duration and “fifteen miles from the primary site where such physician practices,” (which is defined in the statute). In addition, any such noncompete is enforceable only if (essentially) the physician left on his/her own volition or was terminated for cause.
Florida [Trade Secrets]
On February 24, 2016, Florida’s governor, Rick Scott, signed dual trade secrets enhancement bills (SB 180 and SB 182) into law. The former expressly expands the definition of a trade secret under Florida trade secrets law to include financial information. The latter provides increased protection to trade secrets from disclosure under Florida’s public records act. For additional information see Gov. Scott Signs 2 Trade Secrets Bills into Law.
Georgia [Trade Secrets]
In February 2016, the Georgia State Senate focused on the intersection between publics records acts requests and trade secrets, introducing a bill to expand the scope of Georgia’s definition of trade secrets, albeit in a very narrow respect. Specifically, the operative text of the bill (Senate Bill 321) provides, “Neither the state nor any local government shall publicize or otherwise make available 24 to the public any financial, operational, or consumption data related to a person’s use of 25 public utilities, water, or wastewater in any way which identifies such person’s use of 26 public utilities, water, or wastewater without the express consent of such person.” For additional information, see Senate Bill in Georgia Seeks to Expand the Scope of Trade Secret Protection. The bill, however, did not make it through the Georgia Assembly.
In July of 2015, a new law (H.B. No. 1090) took effect banning noncompete agreements in Hawaii took effect for workers in technology businesses. The language of the bill provides that “it shall be prohibited to include a noncompete clause or a nonsolicit clause in any employment contract relating to an employee of a technology business.” The bill further defines “technology business” as a business deriving the majority of its sales from software or information technology development.
On February 12, 2016, the Idaho House of Delegates Business Committee sponsored House Bill 487, that would amend Idaho noncompete law by limiting noncompetes to 18 months, where the only consideration is employment or continued employment.
The bill would also create several rebuttable presumptions: (1) a duration of 18 months or shorter is reasonable; (2) a geographic area that “is restricted to the geographic areas in which the key employee or key independent contractor provided services or had a significant presence or influence” is reasonable; (3) if the scope of the restriction is limited to “the type of employment or line of business conducted by the key employee or key independent contractor while working for the employer” it is reasonable; (4) an employee who is “among the highest paid five percent (5%) of the employer’s employees or independent contractors is a ‘key employee’ or a ‘key independent contractor'” is reasonable; and (5) an employee who is in breach is causing irreparable harm to the employer. The latter two presumptions are rebuttable only if the “employee or independent contractor . . . show[s] that it has no ability to adversely affect the employer’s legitimate business interests.”
The bill was approved by the House on March 14 and sent to the Senate.
On March 17, the bill was favorably reported out of committee and read for the second time in the Senate on March 18.
On March 22, 2016, the Idaho Senate voted 22-13 to pass H487.
On March 25, the bill was delivered to the governor.
On January 26, 2017, a bill was introduced in the House (House Bill 61) to amend the new 2016 law by removing (1) the high burden to rebut a presumption that an employee who is among the highest paid five percent of the company’s employees or independent contractors is a key employee or key independent contractor and (2) the rebuttable presumption of irreparable harm when a key employee or key independent contractor is in breach of a noncompete.
As of May 31, 2016, the Illinois House and Illinois Senate approved Senator Van Pelt and Senator Jacqueline Y. Collins‘s Illinois Freedom to Work Act, which bans the use of noncompete agreements for low wage workers, i.e., those earning $13.00/hour or less.
It becomes effective on January 1, 2017.
On February 12, 2016, Delegates Alfred Carr, Jr. and Kevin Hornberger introduced legislation (HB 1440) to ban noncompetes for low income workers. Specifically, noncompetes would be banned for employees earning $15 per hour or $31,200 annually. In addition, like some bills, the proposal includes a provision purporting to require application of Maryland law, regardless of what other state’s law that might apply. The bill did not pass.
The bill passed the House by an 86-49 vote and is pending in the Senate.
Massachusetts [Trade Secrets and Noncompetes]
On the noncompete side, on March 2, 2016, Massachusetts Speaker of the House Robert DeLeo announced a proposal for Massachusetts noncompete reform in three parts:
1. An exemption for low income workers. The idea is to ban noncompetes for people who rarely, if ever, should be subject to them – people like sandwich shop workers, landscapers, college interns, and the like.
2. A statutory maximum duration of one year.
3. A requirement that employers provide advance notice to employees who will be asked to sign a noncompete together with a stated right to counsel.
The details were not fleshed out at the time, but each had been floated before in certain of the alternative, compromise bills that Representative Lori Ehrlich and Senator Will Brownsberger have filed over the last seven-plus years, since this movement started. (I drafted Representative Ehrlich’s first noncompete bill in December 2008, which she unknowingly filed virtually simultaneously with Senator (then Representative) Brownsberger’s filing of a proposed ban. By the spring of 2009, they began working together on a compromise, and I became the lead draftsperson for all of the various bills that followed.)
On May 16, the Joint Committee on Labor and Workforce Development, co-chaired by Senator Daniel Wolf and Representative John Scibak, favorably reported out a modified version of the noncompete billoutlined by House Speaker Robert DeLeo. Most notably, the bill includes two significant additions: (1) the requirement that all noncompetes qualify as garden leave agreements (i.e., the employee is paid a certain amount during the term of the restriction) and (2) a switch from the current reformation approach for overly-broad noncompetes to the red pencil approach. A summary of the noncompete aspects of the bill can be found here: Bill to limit noncompete deals includes a surprise catch. See also comments by the Associated Industries of Massachsuetts (AIM). In addition, the bill contains the version of the Uniform Trade Secrets Act submitted by Steve Chow on behalf of the Uniform Law Commission and reflecting my input revising certain aspects of the earlier draft that I thought would make trade secrets harder to protect in Massachusetts.
On June 29, the Massachusetts House of Representatives passed a further revised version of the UTSA / noncompete bill (H.4434). In particular, the bill passed by the House (1) tempers the garden leave requirement and (2) eliminates the red pencil approach (leaving the existing reformation approach) to overly-board noncompetes. More details are available at The Massachusetts Noncompete and Trade Secrets Bill Passes House.
On July 14, the Massachusetts Senate passed S.2418, reflecting a different version of the UTSA / noncompete bill, described in part here and in balance here. It varies in several significant respects from the House bill. See Lining up the Massachusetts Senate and House Noncompete | UTSA Bills.
For additional background, the following bills were filed in the legislature earlier in the 2015-2016 session (and remain extant): H.1701 by Representative Lori Ehrlich (proposing a ban, and expressly permitting the courts to issue injunctive relief to remedy a violation of other restrictive covenants, which has come to be known as a “springing noncompete”); a similar bill in the senate (S.957) by Senator Will Brownsberger (albeit the explicit reference to the concept of a “springing noncompete”); H.1761 by Representative Angelo Puopolo (proposing a ban on employee noncompetes); H.1195 by Representative Garrett Bradley; H.1719 by Representative Sheila Harrington (proposing a ban on employee noncompetes); and S.169 by Senator Jason Lewis (proposing a ban on employee noncompetes). For additional information about these bills see Massachusetts Bills to Ban Noncompetes and Adopt UTSA in the New Legislative Session (2015-2016). (Please note that the numbering available at the time has since changed, as the bills were given official bill numbers.) For additional information about earlier alternative approaches see here and here for some of the earlier Ehrlich and Brownsberger bills.
None of the bills passed, although the legislature was as close to passing noncompete reform as it has come since it starting looking at the issue in 2009.
On the trade secrets side, the following bills were filed in the legislature earlier in the 2015-2016 session proposing the adoption of some version of the Uniform Trade Secrets Act: H.32 on behalf of the Commission on Uniform State Laws by Steve Chow (with whom I worked to address several concerns I had with the prior version); H.1195 by Representative Garrett Bradley; H.1408 by Representatives Bradley Jones; and S.169 by Senator Jason Lewis. With the exception of H.32, the other bills are largely refiled versions of earlier bills.
As noted above, on May 16, the Joint Committee on Labor and Workforce Development favorably reported out a modified version of the noncompete billoutlined by House Speaker Robert DeLeo, containing the most-recent version of the Uniform Trade Secrets Act proposed by the Uniform Law Commission.
As also noted above, on June 29, the House passed the noncompete bill, which also contains the version of the same version of the Uniform Trade Secrets Act. See The Massachusetts Noncompete and Trade Secrets Bill Passes House.
Like noncompete reform efforts, none of the bills passed, although the legislature was as close to passing trade secrets reform as it has come since it starting considering adopting a version of the Uniform Trade Secrets Act decades ago.
In February 2016, Republican (yes, Republican) State Representative Peter Lucio of Michigan introduced a bill that would require that employers who have new employees sign noncompetes must provide advance notice of the terms of the noncompete to the prospective employee. It would also prohibit the use of noncompete for low-wage employees. Neither of these approaches is new; nor should they be particularly controversial (especially the notice requirement). For example, Oregon’s noncompete statute employs both of these concepts, New Hampshire’s 2012 noncompete statute requires advance notice, and some of the earlier Massachusetts noncompete law overall bills included these concepts.
However, the bill, which ultimately went nowhere, does include some remedies for an employee (attorneys’ fees and lost income resulting from enforcement or threatened enforcement of the noncompete) if the noncompete is in determined to be unenforceable or reformed to make it enforceable.
On December 7, 2015, Representative Keith Frederick filed House Bill No. 1660 to ban noncompetes between physicians and (as amended) “private, nonprofit health care entit[ies] or governmental health care entit[ies].” (Originally, the bill covered only agreements with nonprofit hospitals.) As of March 1, 2016, a public hearing had been completed, after which the bill sat with the Health and Mental Health Policy Committee. The bill ultimately died.
On January 5, 2017, a new bill to ban noncompetes, House Bill No. 479, was introduced. The bill was voted down on February 8, 2017.
By way of background, on July 21, 2016, the Nevada Supreme Court issued a decision in Golden Road Motor Inn, Inc. v. Islam, dispelling the generally-accepted view that Nevada courts reform overly broad noncompete agreements.
On February 13, 2017, the Nevada Assembly (Assemblyman Carrillo) introduced Assembly Bill No. 149. The bill restricted noncompetes to 3 months and made it a misdemeanor (and established a $5,000 fine per violation) to negotiate, execute, or enforce a noncompete that is longer than 3 months. The bill died on April 25, 2017.
On June 3, 2017, Nevada enacted a new law that made significant changes to Nevada noncompete law. Contrary to the two developments above, the new law made enforcement of noncompetes in easier in some ways and in some ways arguably harder. Specifically, the new law provides in relevant part as follows:
1. A noncompetition covenant is void and unenforceable unless the noncompetition covenant:
(a) Is supported by valuable consideration;
(b) Does not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed;
(c) Does not impose any undue hardship on the employee; and
(d) Imposes restrictions that are appropriate in relation to the valuable consideration supporting the noncompetition covenant.
2. A noncompetition covenant may not restrict a former employee of an employer from providing service 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 covenant as to time, geographical area and scope of activity to be restrained, other than any limitation on providing services to a former customer or client who seeks the services of the former employee without any contact instigated by the former employee. Any provision in a noncompetition covenant which violates the provisions of this subsection is void and unenforceable.
3. An employer in this State who negotiates, executes or attempts to enforce a noncompetition covenant that is void and unenforceable under this section does not violate the provisions of NRS 613.200.
4. If the termination of the employment of an employee is the result of a reduction of force, reorganization or similar restructuring of the employer, a noncompetition covenant is only enforceable during the period in which the employer is paying the employee’s salary, benefits or equivalent compensation, including, without limitation, severance pay.
5. If an employer brings an action to enforce a noncompetition covenant and the court finds the covenant is supported by valuable consideration but contains limitations as to time, geographical area or scope of activity to be restrained that are not reasonable, impose a greater restraint than is necessary for the protection of the employer for whose benefit the restraint is imposed and impose undue hardship on the employee, the court shall revise the covenant to the extent necessary and enforce the covenant as revised. Such revisions must cause the limitations contained in the covenant as to time, geographical area and scope of activity to be restrained to be reasonable and to impose a restraint that is not greater than is necessary for the protection of the employer for whose benefit the restraint is imposed.
6. As used in this section:
(a) “Employer” means every person having control or custody of any employment, place of employment or any employee.
(b) “Noncompetition covenant” means an agreement between an employer and employee which, upon termination of the employment of the employee, prohibits the employee from pursuing a similar vocation in competition with or becoming employed by a competitor of the employer.
New Hampshire [Noncompetes]
On August 5, 2016, Senate Bill 417 became effective and now prohibits physician noncompetes in New Hampshire.
New Mexico [Noncompetes]
New York [Trade Secrets and Noncompetes]
According to the NY AG’s website, the bill will (language from the website, with non-substantive modifications):
- Prohibit the use of noncompetes for any employee below the salary threshold set by Labor Law Section 190(7), currently $900 per week;
- Prohibit noncompete agreements that are broader than needed to protect the employer’s trade secrets or confidential information;
- Require noncompete agreements to be provided to employees before a job offer is extended;
- Require employers to pay employees additional consideration (money) if they sign noncompete agreements;
- Limit the permissible time duration for noncompete agreements; and
- Create a private right of action with remedies including liquidated damages for violations.
The bill clarifies the law of non-compete agreements which has become confusing in light of the Court of Appeals decision in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999). That decision did not purport to replace prior law but to address a situation not clear in prior law. The decision utilizes a balancing test in which the employer’s interest in enforcing the covenant is balanced against the employee’s interest in earning his or her livelihood. Unfortunately, some Courts have interpreted the balancing test as applying in all cases, rather than applying only to employees who were not within categories long considered to be exempt from such restrictive covenants. The bill restores the law so that lower level employees and independent contractors cannot be subjected to restrictive covenants.
The bill also provided the following summary:
The bill establishes clear categories in which restrictive covenants are not enforceable:
1) An employee terminated for reasons other than misconduct. The Court of Appeals has clearly held that the consideration for a non-compete is the promise of future employment not past services rendered. Hence, when an employee is terminated, and future employment is no longer offered, a non-compete cannot be enforced. Morris v. Schroder Capital Mgmt. Int’l, 7 N.Y.3d 616, 621 (2006).
2) Employees who are not unique. A unique employee is one who possesses trade secrets or material that is akin to a trade secret. Cool Insuring Agency, Inc. v. Rogers, 125 A.D.2d 758 (3d Dep’t 1986).
3) Learned professionals such as physicians have always been permitted to enforce non-compete agreements against departing physicians.
4) Noncompetes against attorneys are unenforceable due to the client’s right to counsel of his or her own choosing.
5) Covenants that are unreasonable in geographic extent or length of years. The bill relies on existing case law to define what is meant by “unique employee,” “trade secret,” and geographical or durational reasonableness.
The bill also provided that an noncompetes can be used for employees who purchase, if it is a condition of allowing them to become an owner of a business, or sell a share in the business. The business has an interest in preventing the purchaser or the seller from competing and undermining the future viability of the business.
The bills were assigned the the Senate Labor Committee and Assembly Law Committee, respectively, but ultimately died.
On January 10, 2017, Senator Avella introduced Senate Bill 1589, which would prohibit noncompetes – and nonsolicitation agreements – if an employee has been terminated “for reasons other than misconduct” or if the employee (or independent contractor) who is bound “(I) is not unique; (II) does not posses trade secrets of the business or material that is akin to a trade secret; (III) has not purchased or sold any portion of the business; and (IV) is not a learned professional” (although lawyers are excluded).
On the trade secrets side, in 2015, New York State Senator James Sanders Jr. introduced Senate Bill S3770 to adopt the Uniform Trade Secrets Act. The bill was in the Senate Judicial Committee and ultimately died.
Effective January 1, 2016, Oregon amended its noncompete law to limit the duration to 18 months (from the prior two-year maximum).
On March 2, 2017, the Oregon Senate introduced a bill (Senate Bill 977) to ban noncompetes, and permit only six month (or shorter) customer no-contact (i.e., nonsolicitation) agreements.
In January 2016, Pennsylvania State Representative Thomas Caltagirone announced that he intended to file a bill to ban noncompetes. The bill was never filed.
Prior to this initiative, a bill had been introduced to ban physician noncompetes (HB 336), though that bill ultimately died in committee.
Rhode Island [Noncompetes]
Effective July 12, 2016, Rhode Island passed a law (R.I. Gen. Laws § 5-37-33) invalidating physician noncompetes, except (as are commonly permitted) for those agreements arising from the sale of a practice (provided that they are no longer than five years).
In early 2015, Representatives Daniel Reilly, Michael Chippendale, Joseph Trillo, Brian Newberry, and John Edwards introduced House Bill 5708 to ban employee noncompetes. The last action on the bill was on April 8, 2015, at which time the committee to which it was assigned recommended that it be held for further study. No further action has taken place.
Texas [Trade Secrets]
On May 19, 2017, Texas passed An Act Relating to the Texas Uniform Trade Secrets Act.
The Act defines “clear and convincing” (which is the standard for showing willfulness under the Texas Uniform Trade Secrets Act (UTSA)) and what type of conduct constitutes “willful and malicious misappropriation.” The Act also harmonizes Texas’ UTSA with the Defend Trade Secrets Act (DTSA) language, including adding a definition for who is an “owner” of a trade secret.
Perhaps most significantly as it concerns the DTSA, although modifying the “threatened” misappropriation section, the Act does not track the language of the DTSA that some have argued forecloses the inevitable disclosure doctrine. Rather, the Act merely adds the following underlined language: “Actual or threatened misappropriation may be enjoined if the order does not prohibit a person from using general knowledge, skill, and experience that person acquired during employment.”
In addition, the Act codifies the presumption of a party’s right to participate in the proceedings, subject to a balancing test designed to balance that right against the right of the trade secret owner to protect the secrecy of the trade secret.
On March 22, 2016, Utah passed the Post-Employment Restrictions Act.
Under the Act, all new noncompete agreements executed on or after May 10, 2016, are restricted to one year; any agreement that violates this limit is void. Section 34-51-201.
The Act does not operate retroactively (section 34-51-201), nor does it apply to nonsolicitation agreements or nondisclosure agreements (section 34-51-102 (1)(a)). It also excepts from its purview “reasonable severance agreement[s] mutually and freely agreed upon in good faith at or after the time of termination that includes a [noncompete]” (section 34-51-202(1)) and noncompetes “arising out of the sale of a business, if the individual subject to the restrictive covenant receives value related to the sale of the business” (section 34-51-202(2)).
The Act also provides that the employer is liable for the employee’s attorneys’ fees, costs, and damages if “it is determined that the post-employment restrictive covenant is unenforceable . . . .” Section 34-51-301.
A brief history is here:
On February 11, 2016, the Utah House of Representatives committee considering a bill (HB0251) to ban noncompetes unanimously approved it. That success was followed by another success: at the end of February (2016), the Utah House of Representatives approved the bill.
Nevertheless, there was staunch opposition from the business community. For example (also at the end of February), Jonathan Johnson, Chairman of Overstock.com (and Utah gubernatorial candidate), wrote an opinion for the Daily Herald explaining his view that noncompete agreements “promote fair competition” and “curb theft of business assets in important ways.” See Guest Opinion: Non-compete clauses: good for competition and good for Utah. Others have followed suit. See Business leaders oppose non-compete bill.
On March 1, 2016, the bill was introduced to the Senate standing committee.
On March 4, 2016, the Senate Business and Labor Committee took extensive testimony, pro and con, and issued a favorable recommendation for a substituted bill. SeeEmployee noncompete bill stirs a hornet’s nest in Utah business community and Utah lawmakers debate non-compete agreements, bill advancing to full Senate.
On March 8, as expected, the Utah Senate took up the noncompete bill. However, rather than approve a ban on employee noncompetes (as approved by the House), the Utah Senate approved a bill that would limit the maximum duration of an employee noncompete to one year and, for employers with 20 or more employees, impose legal fees and damages on an employer who sought to enforce an unenforceable noncompete.
On March 9, the Utah Senate made some amendments to the bill and sent the amended version to the House. The amended bill maintains those same provisions, but adds several clarifications. First, the bill now makes clear that the law will apply only to employee noncompetition agreements entered on or after May 10, 2016. Second, it now makes clear that certain types of restrictive covenants agreements are not intended to covered; specifically, nonsolicitation agreements (though it is unclear whether this includes no-raid agreements, sometimes included within the term “nonsolicitation agreement”), nondisclosure (or confidentiality) agreements; noncompetes arising in the context of a (reasonable, good faith) severance agreement; and noncompetes arising in the context of a sale of business (where the individual receives value related to the sale (again, potentially a bit vague)) are all outside the scope of the bill.
The House concurred with the amendments.
On March 10 (the last day to do so), the Utah legislature passed the amended version of the bill.
On March 22, Utah Governor Gary Herbert signed the bill into law.
The law’s passage was quickly followed by subsequent efforts to modify the law further.
On December 21, 2016, House Bill 81 was introduced to require additional consideration (beyond continued employment) for noncompetes entered into after the commencement of employment and to preclude enforcement of noncompetes against employees who were terminated without cause. It also would have limited the time to commence an action for breach to the date that the noncompete restriction expired. The bill died on March 9, 2017.
As more people flowed from to Washington from California than anywhere else in the country (thank you William Molinski and Andrew Arranger of Orrik), Washington introduced three bills relating to noncompetes this past legislative session (ending 2016: a bill to ban noncompetes; a bill to ban the use of noncompetes for low-income employees and persons involuntarily terminated without cause; and a bill that would ban the use of noncompetes for physicians. None passed.
HB 1157, which was originally introduced in 2015 and reintroduced in the 2016 legislative regular session, would ban noncompete agreements for low income workers (someone entitled to overtime compensation or earning $39,000 or less per year), create a presumption that a six month (or longer) restriction is unreasonable (and unenforceable), and prohibit enforcement against an employee who is terminated without just cause or laid off (unless the noncompete is part of a severance agreement). See full text.
HB 1173, which was originally introduced in 2015 and reintroduced in the 2016 legislative regular session, would ban noncompetes for physicians (including separately banning them for physicians practicing osteopathic medicine). See full text.
HB 2406, introduced in 2016, would ban noncompetition agreements for certain employees, based on industry: hair designers, cosmetologists, barbers, manicurists, estheticians, drywall applicators, musicians, fast-food workers. In addition, pursuant to a proposed amendment, the bill would allow attorneys’ fees to be recovered by a prevailing party – including where the restriction is reformed by the court (even if the reformed agreement is enforced against the employee).
HB 2931, introduced in 2016, would ban noncompetition agreements for certain employees (and others), based on category: temporary or seasonal employees; employees terminal without just cause or laid off by the employer; and independent contractors. Further, the bill would preclude the reformation of unreasonable noncompete agreements and create a rebuttable presumption that noncompetes longer than one year and noncompetes for employees who are not “executive employee[s]” (defined in the bill) are unreasonable. A proposed amendment to the bill removed these presumptions.
None of the bills survived past March 2016.
This year (2017), there is a scaled-back bill: HB 1967 (as amended).
The bill codifies certain aspects of Washington state law, and adds some additional requirements. The key aspects are:
- Like all states, unreasonable noncompetes are unenforceable.
- Like most states, the court is permitted to reform (i.e., fix) agreements that are unreasonable.
- Notice of the requirement of a noncompete must be provided, at the latest, at acceptance of the offer of employment.
- Noncompetes required after employment commences must be supported by consideration (continued employment is not sufficient).
- Employers who require an employee to sign a noncompete that the employer knows is unenforceable will be subject to damages (including automatic damages of $5,000) and attorneys’ fees.
- If passed, the bill will apply to existing noncompetes (not just noncompetes entered into after its effective date).
The bill, in its entirety (including describing how it was amended from the original version), states:
Strike everything after the enacting clause and insert the following:
“NEW SECTION. Sec. 1. A new section is added to chapter 49.44 RCW to read as follows:
(1) An unreasonable noncompetition agreement is void and unenforceable. If a court finds a noncompetition agreement unreasonable, it may reform the agreement to make it reasonable and enforceable. If a court reforms an agreement, the party seeking to declare the agreement void shall be deemed the prevailing party for purposes of the agreement and under law.
(2) For a noncompetition agreement to be enforceable, the employer must disclose the terms of the agreement in writing to the prospective employee no later than the time of the acceptance of the offer of employment or, if the agreement is entered into after the commencement of employment, the employer must provide independent consideration for the agreement.
(3) The reformation or unenforceability of a noncompetition agreement does not affect the enforceability of any form of confidentiality, nonsolicitation, or other agreement, or any other terms and conditions between the parties, regardless of whether the other agreement or terms or conditions are contained in the same document as a noncompetition agreement.
(4) If an employer requires an employee to enter into a noncompetition agreement containing provisions the employer knows are unenforceable, the employee may recover actual damages, together with statutory damages of five thousand dollars and reasonable attorneys’ fees and costs.
(5) For purposes of this section:
(a) “Confidentiality agreement” means an agreement between an employer and employee that protects proprietary and confidential information including sales information, business strategies and plans, customer information, price information, and trade secrets as defined in RCW 19.108.010.
(b) “Employee” means an employee of an employer.
(c) “Employer” means any person, firm, corporation, partnership, business trust, legal representative, or other entity that engages in any business, industry, profession, or activity in this state and employs one or more employees, and includes the state, counties, cities, all municipal corporations, public corporations, political subdivisions of the state, and charitable organizations.
(d) “Noncompetition agreement” means an agreement between an employer and an employee that is specifically designed to impede the ability of an employee to compete with the employer upon the termination of the employment relationship. A “noncompetition agreement” does not include a confidentiality agreement or a nonsolicitation agreement.
(e) “Nonsolicitation agreement” means an agreement between an employer and employee that prohibits solicitation by an employee, upon termination of employment: (i) Of any employee of the employer to leave the employer; or (ii) of any customer of the employer to cease doing business with the employer or to compete with the employer.
(6) Except as provided in this section, this section does not restrict the right of an employer from entering into a confidentiality or nonsolicitation agreement, or other terms and conditions of the employment or engagement, with an employee.
NEW SECTION. Sec. 2. This act applies to agreements entered into on or after the effective date of this section.”
Strikes provisions that:
o Make noncompetition agreements void if the employee is a temporary or seasonal employee, or is terminated without just cause or laid off.
o Create a rebuttable presumption that agreements restricting competition for more than one year after termination of employment or for employees who are not executives are unreasonable.
o Make noncompetition agreements with independent contractors void.
Provides that the terms of a nondisclosure agreement must be disclosed no later than the time of the acceptance of the offer of employment, rather than the time of the offer.
Provides that for purposes of liability for requiring an employee to enter into a noncompetition agreement with unenforceable provisions, the employer must know the provisions are unenforceable (deletes “or reasonably should know”). Also provides that costs, in addition to attorneys’ fees, may be recovered.
Strikes intent section.
Makes consistency change to refer to the “agreement” rather than “contract.”
As the amendments indicate, there was no appetite for some of the aspects of the original version that would have imposed greater restrictions on the use of noncompetes.
On March 8, 2017, the amended bill passed the House 97-0. See Scaled-back bill aimed at providing clarity on non-compete deals passes Washington House 97-0.
The bill is still advancing through the legislative process.
Wisconsin, which has historically been extremely hostile to noncompete agreements, has pending a bill that would make enforcement of noncompetes significantly easier, adding presumptions of reasonableness (and what is unreasonable) and bringing Wisconsin in line with the majority of states by permitting reformation (i.e., judicial modification) of overly broad noncompetes. (Indeed, if adopted, Wisconsin would seemly be joining Arkansas, Texas, and Florida in mandating judicial modification.) The bill failed to pass in April 2016.
International [Trade Secrets]
European Union: First introduced by the European Commission in November 28, 2013, the European Union (EU) made significant progress in 2015 in its efforts to unify trade secrets law across the 28 Member States. On December 15, 2015, the European Council, represented by the Luxembourg presidency, reached a provisional agreement with the European Parliament on final language for the Proposal for a Directive of the European Parliament and of the Council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (the “Directive”).
On 14 April 2016, the European Parliament adopted the EU Trade Secrets Directive by a vote of 503-131 with 18 abstentions. See Adoption of the Trade Secrets Directive by the European Parliament.
The Council formally adopted the Directive on June 8, 2016, giving EU countries until June 9, 2018 to bring their laws into compliance.
The Directive seeks to “bring legal clarity and a level playing field to all European companies . . . [and] help increase their interest in the development of research and innovation activities.” In particular, the Directive sets out to cure some of the disparities in trade secrets laws among the Member States, especially as they pertain to (i) defining trade secrets and unlawful acquisition, use, and disclosure; (ii) available remedies and the calculation of damages; (iii) the treatment of good-faith third parties; (iv) the treatment of goods, documents, files or materials that incorporate unlawfully acquired or used trade secrets; and (v) the protection of trade secrets during and after the course of litigation.
I have addressed the more important details of the Directive in my materials for the Boston Bar Association Year in Review (2015) Trade Secrets (pages 16-20).
England: England is considering whether to take California’s approach of banning noncompetes. See Government pledges to act on employment rules that could be stifling British innovation and Nonsense and Non-competes.
Japan: Effective January 1, 2016, Japan made significant changes to enhance its trade secrets laws. For a summary of the changes, see David Case or Orrick’s David Case‘s “We’re Not Gonna Take It!” Significant Changes to Japan’s Trade Secret Protection Law.
Pacific Rim: On October 4, 2015, representatives of 12 Trans-Pacific Partnership countries (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam) announced the conclusion of negotiations over the largest regional trade agreement in history: the Trans-Pacific Partnership Agreement (the “TPP”).
Although focused on enhancing trade among Pacific Rim countries, the TPP contains some potential implications for trade secrets (as well as trademarks, copyrights, and patents) in the United States. Specifically, Article 18.78 (the only place in the entire 30-chapter, 2,000-page agreement that even touches on trade secrets43) addresses the protections for trade secrets that each country must have in place and provides, in full, as follows:
Article 18.78: Trade Secrets
1. In the course of ensuring effective protection against unfair competition as provided in Article 10bis of the Paris Convention, each Party shall ensure that persons have the legal means to prevent trade secrets lawfully in their control from being disclosed to, acquired by, or used by others (including state-owned enterprises) without their consent in a manner contrary to honest commercial practices. As used in this Chapter, trade secrets encompass, at a minimum, undisclosed information as provided for in Article 39.2 of the TRIPS Agreement.
2. Subject to paragraph 3, each Party shall provide for criminal procedures and penalties for one or more of the following:
(a) the unauthorised and wilful access to a trade secret held in a computer system;
(b) the unauthorised and wilful misappropriation of a trade secret, including by means of a computer system; or
(c) the fraudulent disclosure, or alternatively, the unauthorised and wilful disclosure, of a trade secret, including by means of a computer system.
3. With respect to the relevant acts referred to in paragraph 2, a Party may, as appropriate, limit the availability of its criminal procedures, or limit the level of penalties available, to one or more of the following cases in which:
(a) the acts are for the purposes of commercial advantage or financial gain;
(b) the acts are related to a product or service in national or international commerce;
(c) the acts are intended to injure the owner of such trade secret;
(d) the acts are directed by or for the benefit of or in association with a foreign economic entity; or
(e) the acts are detrimental to a Party’s economic interests, international relations, or national defence or national security.