Archives for March 2018

When a company is sued for trade secret misappropriation, will an insurance company cover it? As made evident in Sentinel Insurance Company, LTD v. Yorktown Industries, Inc., 2017 U.S. Dist. LEXIS 14439, 2017 WL 446044 (N.D. Ill. Feb. 2, 2017), it very much depends upon the insurance carrier and the terms of its policy.

In that case, Yorktown was accused of stealing and misusing a client list and sales information. When the company was sued for violating the Uniform Trade Secrets Act, it demanded indemnification under its insurance policy, which provided coverage for claims for “personal and advertising injury.” Yorktown argued that the trade secret misappropriation claim was essentially an accusation of stealing another’s “advertising idea.”Judge Robert Dow held that the alleged misconduct in no way resembled the copying of an “advertising idea” or copied trade secrets in an advertisement. He also noted that the policy expressly excluded claims regarding the misappropriation of trade secrets.

Though the insurance carrier in Yorktown did not have to pay out, many insurance policies will cover actions related to the misappropriation of trade secrets. A company should always inquire to see whether trade secrets claims are indemnified by its insurance policy.

To learn about how Castaybert PLLC can assist with trade secret matters, please click here.

In 2017, courts grappled with various issues with respect to the Defend Trade Secrets Act. First, there are nuances regarding the timing of the conduct to which the Act applies. In Cave Consulting Grp., Inc. v. Truven Health Analytics Inc., 2017 U.S. Dist. LEXIS 62109 (N.D. Cal. Apr. 24, 2017), the court stated that the plaintiff failed to state a claim under the DTSA because it did not adequately specify whether the misappropriation occurred before or after the Act became effective (May 11, 2016). But the court allowed the plaintiff to amend its claim, suggesting that even though the alleged misappropriator may have acquired or disclosed the confidential information prior to May 11, 2016, the Act also contemplates a theory of liability for improper use of information. The court stated “[n]othing suggests that the DTSA forecloses a use-based theory simply because the trade secret being used was misappropriated before DTSA’s enactment.” Therefore, plaintiffs in DTSA actions should be sure maintain usage of trade secret information after May 11, 2016, even if they cannot prove that the information was taken after this date.

Second, specific requirements were identified regarding proper pleadings under the DTSA. Plaintiffs must adequately allege that they took reasonable steps to maintain the secrecy of confidential information. In an action where the plaintiff did not allege that employees were required to sign confidentiality agreements or any other indicia of reasonable precautions to protect secret information, the court dismissed with prejudice. Raben Tire Co. v. Dennis McFarland, 2017 U.S. Dist. LEXIS 26051 (W.D. Ky. Feb. 24, 2017). But where a plaintiff alleged that it required employees to sign a confidentiality agreement and that information was not disseminated outside the workplace, the court found this sufficient to withstand a motion to dismiss. Aggreko, LLC v. Barreto, 2017 U.S. Dist. LEXIS 35573 (D. N. Dak. Mar. 13, 2017).

Finally, enforcement rights under the DTSA have been narrowed. Ex parte seizures of property in trade secret misappropriation cases were limited in California and Indiana, where courts held that statutory seizure orders are be available in extreme circumstances, when injunctions or temporary restraining orders would be inadequate. See OOO Brunswick Rail Mgmt. V. Sultanov, 2017 U.S. Dist. LEXIS 2343 (N.D. Cal. Jan. 6, 2017). Standards for seizures of property under the DTSA have therefore been held to be higher than for seizures under Rule 65 of the Civil Rules of Federal Procedure, for which courts have indicated strong preference.

To learn about how Castaybert PLLC can assist with trade secret matters, please click here.

Traditionally, non-compete agreements were used to prevent employees from leaving a company and taking clients and important business information, including trade secrets, with them. In recent years, however, legislatures and courts have taken an increasingly hostile stance toward traditional non-compete agreements, and garden leave provisions are gaining popularity as a helpful alternative.

The Decline of Non-Competes for Low-Wage Workers

Multiple states, including Illinois, Maryland, Massachusetts, Missouri, New Hampshire, New York, Oregon, Pennsylvania, Vermont and Washington have proposed legislation that would ban or void non-competes for low-wage workers. In Maryland, non-competes would be ineffective for employees earning less than $15 per hour or $31,200 per year, and in New York, they would be banned on employees earning under $40,560 per year. In Illinois, non-compete agreements signed by employees earning under $1 million per year would be void.

Nevada recently enacted A.B.N. 276, which voids non-compete agreements unless they (i) are supported by “valuable consideration”, (ii) do not impose any restraint that is greater than required for the employer’s protection, (iii) do not impose any undue hardship on the employee, and (iv) impose restrictions that are appropriate relative to consideration provided. The statute also mandates that judges “blue pencil” overbroad non-competes so they are enforceable.

Two federal bills limiting non-competes have also been proposed: LADDER Act H.R. 2873 and MOVE Act S.1504. The LADDER Act (Limiting the Ability to Demand Detrimental Employment Restrictions Act) would (i) prohibit employers from entering into non-compete covenants with low-wage employees (those making less than the greater of $15 per hour or the state minimum wage) engaged in commerce or in the production of goods for commerce, and (ii) require an employer of such employees to post notice of that prohibition in a conspicuous place on the employer’s premises. The MOVE Act (Mobility and Opportunity for Vulnerable Employees) provides the same terms, except that it defines “low-wage employee” as an employee who earns less than (i) $15 per hour, (ii) the state or local minimum wage, or (iii) $31,200 per year.

The Rise of the Garden Leave

Garden leave provisions require an employee to provide notice in advance of his or her resignation (often 30 – 90 days), during which time the employee does not work but continues to earn a salary. Though the employee is free to simply “tend the garden” during this time, he or she is still on the employer’s payroll and therefore still owes a duty of loyalty, which means the employee cannot work with or for a competitor during this time.

There are a number of considerations in drafting a garden leave provision, which may be included not only in employment agreements but also in offer letters and stock option plans. Employers must determine who will be subject to the garden leave provision, how long the notice period will be and the compensation that will be paid (often, an employee will continue to receive his or her regular salary but will no longer be entitled to certain fringe benefits). The provision may allow the employer to shorten or waive the provision at its discretion. Most importantly, the provision should reserve the employer’s right to exclude the employee from performing work, potentially including a restriction on the employee’s access to the workplace.

To learn how Castaybert PLLC can assist with matters of employment law, please click here.