March 21, 2017

Supreme Court Rules That NLRB Acting GC Became Ineligible To Serve After Nomination To Permanent Role

By Steve Gutierrez

Once a President nominates a candidate for a Senate-confirmed office, that person may not serve in an acting capacity for that office while awaiting Senate confirmation, pursuant to a ruling today by the U.S. Supreme Court. In a 6-to-2 decision, the Court ruled that Lafe Solomon, who had been appointed by President Obama to serve as acting general counsel for the National Labor Relations Board (NLRB) during a vacancy, could no longer serve in that acting role after the President later nominated him to fill the position outright.

NLRB General Counsel Appointment

The position of general counsel of the NLRB must be filled through an appointment by the President with the advice and consent of the Senate – a so-called “PAS” office. When a vacancy in a PAS office arises, the President is permitted to direct certain officials to serve in the vacant position temporarily in an acting capacity. Under the Federal Vacancies Reform Act of 1998 (FVRA), only three classes of government officials may become acting officers. The FVRA,  however, prohibits certain persons from serving in an acting capacity once the President puts that person forward as the nominee to fill the position permanently.

In Lafe Solomon’s case, he was directed by President Obama in June 2010 to serve temporarily as the NLRB’s acting general counsel when the former general counsel resigned. Solomon had worked for ten years as the Director of the NLRB’s Office of Representation Appeals and was within the classes of officials who could be directed to serve in an acting capacity under the FVRA. In January 2011, President Obama nominated Solomon to serve as the NLRB’s general counsel on a permanent basis. Solomon continued to serve as acting general counsel for an additional two-plus years as the Senate failed to act on his nomination. In mid-2013, the President withdrew Solomon’s nomination, putting forward another candidate whom the Senate confirmed in late October 2013.

Company Facing ULP Argued Solomon Couldn’t Be Acting GC After Nomination

In January 2013, while Solomon was acting general counsel, SW General, Inc., a company that provides ambulance services, received a complaint alleging it committed an unfair labor practice (ULP) for failing to pay certain bonuses to employees. After an administrative law judge and the NLRB concluded that SW General had committed the ULP, the company argued in court that the complaint was invalid because Solomon could not legally perform the acting general counsel duties after the President had nominated him for the permanent position. The company pointed to wording in the FVRA restricting the ability of acting officers to serve after being nominated to hold the position permanently. Whether the FVRA prohibits all classes of acting officials or only first assistants who automatically assume acting duties from continuing to serve after nomination was the issue before the Supreme Court.

Once Nominated, Official Is No Longer Eligible To Serve In Acting Capacity

The Court ruled that once a person has been nominated for a vacant PAS office, he or she may not perform the duties of that office in an acting capacity. The Court rejected the NLRB’s position that the FVRA restricted only first assistants who were in an acting capacity, rather than restricting all classes of officials directed to serve in an acting capacity who are later nominated for the permanent position. In applying its ruling to Lafe Solomon, the Court ruled that Solomon’s continued service as the NLRB acting general counsel after he had been nominated to fill that position permanently violated the FVRA. NLRB v. SW General, Inc., ___ 580 U.S. ___ (2017).

Solomon’s Actions “Voidable”

So what does this mean for all of Solomon’s actions taken during the over two-year period in which Solomon improperly served as the acting general counsel after his nomination for the permanent position? For example, what happens to the ULP complaints filed by, or at Solomon’s direction, during that period?

The Court noted in a footnote that the FVRA exempts the general counsel of the NLRB from the general rule that actions taken in violation of the FVRA are void ab initio (i.e. from the beginning). The Court of Appeals had ruled that Solomon’s actions during that period were “voidable.” Because the NLRB did not appeal that part of the lower appellate court’s ruling, it was not before the Supreme Court to decide. Consequently, the Court of Appeals’ decision that Solomon’s actions are voidable stands. Accordingly, each action taken by Solomon during the time that he improperly served as acting general counsel would need to be challenged on an individual basis.

March 7, 2017

Utah Payment of Wages Act Amendments Passed

By Bryan Benard

On March 7, 2017, the Utah Legislature passed a bill amending certain provisions of the Utah Payment of Wages Act (“UPWA”). H.B. 238 was sponsored by Representative Tim Hawkes and if signed into law by the Governor, will make three primary changes to the law.

Individual Liability For Payment of Wages 

First, the bill changes the definition of “employer” from a unique Utah definition to the definition of employer as used in the federal Fair Labor Standards Act (“FLSA”). The change will allow case interpretation of the FLSA definition of employer to apply to Utah employers under the UPWA. The reason behind this change is to clarify that in certain situations, individual directors and officers of companies may be held individually liable for the non-payment of wages. In a 2015 case, the Utah Supreme Court had ruled that there was no individual liability under the UPWA (Heaps v. Nuriche, 2015 UT 26), causing the Utah legislature to take action this session to effectively overrule that decision, replacing it with the individual liability standards applicable under the FLSA.

Private Cause of Action 

Second, this new law expressly creates a private cause of action for wages under the UPWA. This change also was prompted by a court ruling, namely Self v. TPUSA, Inc., 2009 U.S. Dist. LEXIS 10822, D.Utah Jan. 16, 2009, in which the federal court in Utah suggested that there was no private right of action under the UPWA. After the effective date of the new amendments, a private citizen clearly has the right to file a lawsuit to recover payment of wages under the UPWA in Utah state court. The amendments also provide that Utah state courts may award actual damages (i.e., the unpaid wages), a potential penalty for the violation, and an amount equal to 2.5% of the unpaid wages owed for up to 20 days.

Administrative Process Mandatory For Smaller Wage Claims 

Finally, the new law requires that certain wage claims alleging a violation of the UPWA be filed first with the Utah Labor Commission. Currently, employees “may” file a wage claim at the Commission. After enactment, all wage claims that are less than $10,000 must first be filed with the Labor Commission and the party must exhaust the administrative remedies there on such claims. Claims that are greater than $10,000, employees with multiple claims (that aggregate above $10,000), or multiple employees in the same civil action whose claims together are greater than $10,000, may file such claims directly in court without exhausting the administrative remedies.

Next Steps 

Utah employers should certainly take note of these changes, and specifically the potential for individual liability of directors and officers for the payment of wages. It is also worth watching to see if the new express private right of action increases the amounts of wage claims brought in Utah.

March 7, 2017

New Immigration Executive Order Scales Back Earlier Travel Restrictions

By Roger Tsai

On Monday, March 6th, President Trump signed a new, narrower Executive Order (EO) that temporarily restricts travel to the United States by citizens of six Muslim-majority countries. The new EO revokes the administration’s earlier order that was issued on January 27, 2017. Here are the highlights of the new EO and how it may affect employers in the U.S.

Ninety-day Travel Restrictions

The new EO restricts entry into the U.S. of nationals from six countries for 90 days from the effective date of the order, which is March 16, 2017. The six restricted countries are Iran, Syria, Yemen, Libya, Sudan, and Somalia. During the 90-day suspension period, the Secretary of Homeland Security is directed to conduct a worldwide review to identify additional information that is needed from each foreign country to determine whether individuals who apply for a visa, admission, or other immigration adjudication, are a security or public-safety threat. 

Iraq No Longer Subject To Travel Restrictions

As we reported earlier, the administration’s January executive order sought to temporarily restrict travel to the U.S. from seven Muslim-majority countries, and only Iraq has been removed from the list due to the “close cooperative relationship between the United States and the democratically elected Iraqi government, the strong United States diplomatic presence in Iraq, the significant presence of United States forces in Iraq, and Iraq’s commitment to combat ISIS.” The EO further notes that since the January EO was issued, the Iraqi government has taken steps to increase information sharing, travel documentation, and the return of Iraqi nationals who are subject to final orders of removal. Consequently, the temporary travel restrictions will not apply to Iraqi citizens.

Exceptions for Valid Visa Holders and Lawful Permanent Residents

Unlike the confusion caused by the January executive order, the new EO specifies that it does not apply to lawful permanent residents of the U.S. (green card holders) or to foreign nationals of the designated countries who hold a valid visa. The new EO does apply to individuals from the six designated countries who are outside the U.S. and do not have a valid visa on March 16, 2017. In addition, exceptions to the restriction exist for:

  • any foreign national admitted to or paroled into the U.S. on or after the effective date of the order,
  • any foreign national who has a document other than a visa, valid on the effective date of the order or issued any date thereafter, that permits travel to the U.S.,
  • any dual national of one of the designated countries when traveling on a passport issued by a non-designated country, and,
  • any foreign national who has been granted asylum, any refugee who has already been admitted to the U.S., or any individual who has been granted withholding of removal, advance parole, or protection under the Convention Against Torture.

Additional waivers of the suspension of entry from the designated countries may be decided on a case-by-case basis, including when the individual has previously been admitted to the U.S. for a continuous period of work, study, or other long-term activity and seeks to reenter the U.S. to resume that activity. Exceptional waivers may also be granted for spouses, children, or parents of a U.S. citizen, permanent resident, or lawful nonimmigrant where a denial of entry causes undue hardship.

Visa Interview Waiver Program Immediately Suspended

The new EO suspends immediately the Visa Interview Waiver Program, which allows travelers to renew travel authorizations without an in-person interview. Now, all individuals seeking a nonimmigrant visa will have to partake in an in-person interview, unless traveling for certain diplomatic or other excepted purposes. 

Refugee Program On Hold For 120 Days

The new EO suspends decision on applications for refugee status for 120 days after the effective date of the order. Unlike the January order, this EO does not single out refugees from Syria as indefinitely suspended. The EO caps the entry of refugees in fiscal year 2017 at 50,000.

March 16, 2017 Effective Date

The new EO becomes effective at 12:01 a.m. on Thursday, March 16, 2017. This advance effective date allows all agencies, airports, airlines, employers, individuals, and others affected by the order to plan for its restrictions.

What Employers Need To Consider

The suspension of the Visa Interview Waiver Program could result in delays for some foreign nationals traveling to the U.S. who now must undergo an in-person interview. Employers who employ individuals in the U.S. with unexpired visas from the designated countries should not be impacted because the suspension only affects workers currently outside the U.S. without a valid visa on the March 16, 2017 effective date. Employers seeking to employ or otherwise work with foreign nationals without existing visas from the six designated countries may need to seek a waiver under the case-by-case review process. We will continue to monitor this order, including any legal challenges that may be filed.

March 2, 2017

Remove That Liability Waiver From Your FCRA Disclosure Form

By Mark Wiletsky

If you use an outside company to run background checks on your applicants or employees, you need to review your disclosure forms asap to make sure the forms don’t violate the Fair Credit Reporting Act (FCRA).

In a case of first impression by a federal court of appeals, the Ninth Circuit recently ruled that a prospective employer willfully violated the FCRA by including a liability waiver in its FCRA-mandated disclosure form it provided to job applicants. Syed v. M-I, LLC, 846 F.3d 1034 (9th Cir. 2017). In fact, any extraneous writing on the disclosure form can lead to significant liability for a willful FCRA violation. And if you think you are safe by using forms provided by your background check company, think again.

FCRA Refresher

Background checks that inquire into a person’s criminal history, driving record, employment history, professional licensing, credit history, or other similar records, can either be done in-house or by an outside third party. In other words, your HR department may make calls, check online resources, or contact law enforcement or the DMV to obtain this information directly, or your company may outsource this function to a background check company that can do the leg work for you. If you use a background check company or another third party to compile this information on your behalf, the information provided to you is considered a consumer report and is subject to the FCRA.

Because of the private nature of this information, the FCRA limits the reasons for which consumer reports may be obtained. Using consumer reports for employment purposes is a permissible purpose under the FCRA, but such use comes with numerous obligations. In 1996, concerned that prospective employers were obtaining and using consumer reports in a way that violated applicant’s privacy rights, Congress amended the FCRA to impose a disclosure and authorization provision. Pursuant to that provision, a prospective employer is required to disclose that it may obtain the applicant’s consumer report for employment purposes and it must obtain the individual’s consent prior to obtaining the report.

FCRA Disclosure Must Consist “Solely” of Disclosure

Specifically, the FCRA provision states that a person may not procure a consumer report for employment purposes with respect to any consumer unless “(i) a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes; and (ii) the consumer has authorized in writing (which authorization may be made on the document referred to in clause (i)) the procurement of the report by that person.”

It is clear that the required disclosure should be its own standalone document and should not be included within a job application or other onboarding documents. It is also clear that the authorization (consent form) may be included on the disclosure document. But what about other information? May the disclosure form include a statement that the applicant releases the employer (and/or the background check company) from any liability and waives all claims that may arise out of use of the disclosure and obtaining the background check report?

Court Nixes Liability Waiver As Willful FCRA Violation

What may or may not appear in an FCRA disclosure form has been a hot topic in recent years. Numerous class actions have been filed by job applicants (and their aggressive attorneys) alleging that any extraneous language in a disclosure form violates the requirement that the document consist “solely” of the disclosure. Although numerous lower federal courts have grappled with the meaning of that provision, the Ninth Circuit became the first federal appellate court to examine it. (The Ninth Circuit’s rulings apply to Montana, California, Idaho, Washington, Oregon, Nevada, Arizona, Alaska, and Hawaii.)

In Syed’s case, the prospective employer provided applicants with a document labeled “Pre-employment Disclosure Release” that appears to have been obtained from its background check company, PreCheck, Inc. The third paragraph on the single-page document included the following statement:

“I hereby discharge, release and indemnify prospective employer, PreCheck, Inc., their agents, servants and employees, and all parties that rely on this release and/or the information obtained with this release from any and all liability and claims arising by reason of the use of this release and dissemination of information that is false and untrue if obtained from a third party without verification.”

On behalf of a class of over 65,000 job applicants, Syed alleged that by including this liability waiver, his prospective employer and the background check company violated the statutory requirement that the document consist “solely” of the disclosure. The Ninth Circuit agreed.

The Court found that the text of the FCRA provision was unambiguous and that even though the law permits the authorization to be included on the disclosure document, that was an express exception authorized by Congress. The Court further explained the difference between an authorization and a waiver by stating that the authorization requirement granted authority or power to the individual consumer whereas the waiver requires the individual to give up or relinquish a right. Therefore, the Court rejected the employer’s argument that the FCRA permits the inclusion of a liability waiver in the disclosure.

Moreover, the Court deemed this FCRA violation to be willful. Stating that “this is not a ‘borderline case,’” the Court ruled that the employer acted in reckless disregard of its statutory duty under the unambiguous disclosure requirement. As a willful FCRA violation, the employer faces statutory damages of between $100 and $1,000 per violation (remember, there were over 65,000 class members), plus punitive damages and attorneys’ fees and costs. Read more >>

February 27, 2017

Union Organizing At Boeing, Yale University, and Elsewhere Show Need For Swift Response

By Steve Gutierrez

Union organizing campaigns have been in the news a great deal lately. Graduate students at Yale University voted this week in favor of unionizing. But Boeing workers at its South Carolina factory recently rejected representation by the International Association of Machinists, after a long and bitter organizing campaign. What makes the difference between a “yes” or “no” vote? The key lies in understanding current organizing tactics and preparing a timely, effective response.

Boeing Defeats Union Vote In South Carolina

According to news reports, 74 percent of over 2,800 workers at Boeing’s South Carolina factory voted against the union. The election was significant because it is believed that Boeing opened its Dreamliner assembly line in South Carolina at least in part to escape the strong union that represents Boeing’s workforce in its home state of Washington. South Carolina is one of the least unionized states in the country and Boeing mounted a strong opposition to the union campaign there.

Boeing’s South Carolina production and maintenance workers sought more consistent work instructions, fairer evaluations, and higher wages and benefits, according to news reports. In opposition, Boeing is described as emphasizing that the union had earlier opposed expansion of the South Carolina factory and that the union would only come between workers and management.  Reports also describe a series of edgy opposition ads ran by a group closely tied to the South Carolina Manufacturers Alliance, to which Boeing belongs, including one that showed a machinist as a casino boss who pushed workers to gamble away their future. The strong opposition campaign appears to played a significant role in the rejection of the union in the recent vote.

Yale University Grad Assistants Favor Union 

In 2016, the National Labor Relations Board ruled that graduate student employees, such as teaching and research assistants, on private campuses are entitled to form a union and collectively bargain.  (See our post on that ruling here.) That ruling overturned long-standing Board precedent against treating graduate assistants as employees who are entitled to the rights and protections of the National Labor Relations Act. In the short time since last summer’s ruling, at least three campuses have seen graduate students form unions, with Yale University as the latest.

News reports cite numerous motivations behind the teaching assistant’s push for a union, including funding security, mental health care, affordable child care, and equitable pay. Yale, which had expressed its opposition to the 2016 NLRB ruling, warned graduate students that a union could alter their relationship with faculty members and limit their individual power as the union made decisions for everyone. The union’s margin of victory in this week’s election was reported to be slim.

Union organizers took a unique approach at Yale, seeking to have individual departments hold separate elections for their respective grad assistants. This tactic of using micro-units has proven successful in other organizing campaigns as the union need only convince a smaller number of employees in a particular department to vote “yes” rather than getting a majority of all employees holding the same position companywide to vote in favor of the union. In Yale’s case, the union Unite Here was successful in getting the graduate assistants in eight of nine departments to vote in favor of joining the union.

Understanding Union Organizing Tactics

The fast pace of union elections under the “quickie election” rules can significantly favor union organizers. As we’ve written in a prior post, the NLRB’s new election process, in effect since April 2015, accelerates the election process by shortening the time between a union’s filing of a representation petition and the holding of the vote. That time may be as short as two weeks, leaving management little time to ramp up an opposition campaign. Unions can seek to catch employers off guard or unprepared, using the quick election process to win elections without an organized response from management. Read more >>

February 25, 2017

Utah’s Non-compete Research Study Results Released: No New Non-compete Legislation in 2017

By Bryan Benard

The results from an unprecedented research study seeking input from 2,000 Utah employees and 937 Utah employers about the use of non-compete agreements has just been released and can be viewed on the Salt Lake Chamber of Commerce website here:

http://slchamber.com/noncompetestudy/

Initial Reactions

Some interesting results jump out immediately. Based on the responses, 18% of Utah employees currently have a signed non-compete with their employer. 35% of the employee respondents indicated that at some point in their careers, they had been asked to sign a non-compete. 96% of employee respondents stated that they were aware that they were signing a non-compete when they signed the agreement. 40% of employees with current non-competes in Utah believed their non-compete agreement was fair or moderately fair, while another 34% believed that their non-compete was somewhat fair. 26% of employees did not believe that their current non-compete was fair. 51% of responding employees indicated that they were ok signing a non-compete if the terms were fair.

The study seemed to confirm that last year’s non-compete bill, limiting non-competes to one year in duration, was an appropriate duration. 90% of employer respondents, and surprisingly, 74% of employee respondents, responded that Utah law should allow non-compete agreements if they are supported by consideration/value and are reasonable in scope and duration. Most employee and employer respondents indicated that they believed it was rare that a non-compete agreement dispute resulted in a court case.

Through focus group research, in addition to the survey question results, some areas of overlapping agreement appears likely between positions held by employers and employees.  Some themes indicate that there could be some consensus relating to not allowing usage of non-competes with lower wage earners and perhaps requiring more notice to employees about non-competes at the beginning of employment.  The survey results are extensive and impressive, and will require significantly more review and consideration.

Legislative Response

Good information should drive good policy decisions. Speaker Greg Hughes, Representative Mike Schultz, and Representative Tim Hawkes have been very committed to the research-first process. They have supported this unprecedented effort at collecting Utah-specific information that will then drive their policy decisions.

With only 9 business days left in this legislative session, thoughtful legislation based on these results would be very difficult, if not impossible, to propose, debate, and consider. Hours after the results were released, Representative Schultz indicated that rather than pursuing legislation on non-compete agreements this year, he and Representative Hawkes remain committed to working with the working group and other stakeholders to utilize this research and take sufficient time to consider further legislation. Here is his statement. As a result, it looks like there will be no further legislative action on non-compete agreements this session but continued work will take place before the 2018 legislative session.

Research Study Process

During the 2016 Legislative session, a working group was formed to try to reach a compromise on the 2016 non-compete bill. The working group consisted of the legislators proposing the non-compete legislation, business leaders (Randy Shumway, Vance Checketts, Jeffrey Nelson, and Dan Sorenson), the Salt Lake Chamber (Lane Beattie, Abby Osborne and Michael Parker), the Governor’s Office of Economic Development (Val Hale, Aimee Edwards), and Bryan Benard of Holland & Hart LLP. After the session, the working group discussed the concept of a Utah-specific research study of Utah-based employees and employers, related to the use of non-competes in Utah. The Cicero Group was tasked with conducting the research study and the study was funded 50/50 by the Legislature and the business community.

The survey questions were developed by Cicero group in conjunction with two employment law lawyers who donated their time, Jaqualin Friend Peterson (employee-side) and Bryan K. Benard of Holland & Hart LLP (employer-side). Input was then sought from each legislator, the business community, and the public, with all comments and suggestions reviewed, discussed, and addressed through several revisions to the study questions. Hundreds of hours were spent in this process to prepare a comprehensive, unbiased survey—one tailored to employees and one for employers that covered the same issues.

The survey was conducted over several months with 2,000 employees and 937 employers responding. Employees from a broad variety of private companies (both large, medium and small in size) were eligible. Employers of diverse industries and sizes were also eligible. Focus groups were also conducted by the Cicero group as were interviews of potential investment firms. The full methodology is set forth in the survey results.

Next Steps

Digesting and understanding the research results will be a large task given the comprehensive and unique nature of the survey itself. While there is academic research and writing on this topic, this type of specific employee/employer responses seems unique and provides a fascinating perspective. And it is certainly full of important information for Utah legislators to absorb and consider. The Salt Lake Chamber will also host two open houses with the Cicero research team on February 28 and March 1, 2017, from 2-4 p.m. at the Chamber.

The study results also provide helpful information for employers to consider and assess with respect to their own practices. Given this large undertaking, it is likely that the information will be discussed, and potential legislation may arise on this topic, for years to come.

Finally, the exceptional work by the Cicero Group should be commended and recognized. Also, the leadership of the Salt Lake Chamber was the driving force to this process and was invaluable.

February 23, 2017

Nevada Non-Compete Agreements Under Attack in Legislature

By Dora Lane

Non-compete provisions in employment contracts will be vastly limited if a new bill recently introduced in the Nevada Assembly is enacted into law. AB 149 would make a non-compete restriction void and unenforceable if it prohibits an employee “from pursuing a similar vocation in competition with or becoming employed by a competitor of his or her employer for a period of more than 3 months after the termination of the employment of the employee.”  (emphasis added.)

Reasonableness Restricted To Three Months

Under current Nevada law, an employer may enter into an agreement with an employee that prohibits the employee from competing with the employer or becoming employed with a competitor for a specified period of time. (NRS 613.200). The Nevada Supreme Court has held that such restraints of trade must be reasonable to be enforceable. According to the Court, a non-compete agreement is reasonable if the restraint is not “greater than is required for the protection of the person for whose benefit the restraint is imposed” and does not impose an undue hardship on the person restricted by the non-compete. In determining whether a specific non-compete restriction is reasonable, Nevada courts look at the duration of the restriction, the territory in which the employee is restrained from employment, and the type of employment that the employee is restrained from pursuing.

The new bill would set a concrete limit on the reasonableness of post-employment competitive restrictions by limiting the duration to three months or less. Any non-compete seeking to restrict competitive activity by a former employee for more than three months would be against public policy, void, and unenforceable. The bill states that a longer restriction necessarily imposes a restraint greater than necessary for the protection of the employer and creates an undue burden for the employee.

Fines and Penalties For Longer Non-Competes

AB 149 would impose penalties on persons, associations, companies, corporations, agents, or officers who negotiate, execute, and enforce agreements that are not compliant with the bill’s mandates. In other words, if an employer willfully enters into a non-compete agreement that restricts post-employment competition for longer than three months, it may be subject to fines and penalties. Parties who willfully prevent a former employee from obtaining employment elsewhere beyond the three-month restriction would be guilty of a gross misdemeanor and subject to a fine of up to $5,000. In addition, the Labor Commissioner could impose against each responsible party an administrative penalty of up to $5,000 for each violation as well as investigative costs and attorney’s fees incurred in any associated proceeding.

Stay Tuned

As proposed, the non-compete limitation would become effective July 1, 2017. The bill was referred to the Committee on Commerce and Labor after its introduction by Assemblyman Richard Carrillo. We will continue to follow this bill as it is considered by the Nevada legislature.

February 17, 2017

Utah Non-Compete Bill Fails To Pass The House

By Bryan Benard

The first attempt to further revise the new Utah law on post-employment restrictive covenants (non-competes) has failed.  House Bill 81, by Representative Greene from Utah County, would have further limited the use and viability of non-compete agreements in Utah.  On Friday afternoon February 17, 2017, the House rejected the bill (22 voted “yes” and 49 voted “no”).  Consequently, there is no current non-compete bill in play at the Legislature.

Much of the floor debate focused on waiting for the results of the non-compete study that is being conducted by the Cicero Group (and with which Holland & Hart’s Bryan Benard spent hours assisting with the drafting of the questions).  The study was part of the compromise with House Leadership brokered by the working group created by the Salt Lake Chamber and the Governor’s Office of Economic Development (of which Mr. Benard was a member).  The research study results will come out February 24, 2017.

After the results come out, it is likely that Representative Schultz (and Speaker Hughes) will propose a bill related to the results, so please stay tuned.

Other Utah bills to watch:

HB238 has revisions to the Payment of Wages Act and passed the House earlier this week and is now in Senate committee.

HB242 proposed extending Family and Medical Leave Act requirements to employers with 30 or more employees (rather than 50 or more under federal law).  This bill is currently being held in committee and rumor is that it will not proceed.

HB213 has significant revisions to Utah’s Antidiscrimination Act which could be harmful to Utah employers.  Currently the bill is headed to the House Business and Labor Committee for hearing.

February 16, 2017

Court Overturns $1.3 Million Trade Secret Award Because Design Isn’t Secret

By Mark Wiletsky

Businesses often go to great lengths to protect the secrecy of an essential product design or valuable manufacturing process. But if that design or process is commonly known in the industry, it isn’t actually secret and won’t be protected under trade secret law. One business recently had a $1.3 million jury award for trade secret misappropriation overturned when the Colorado Court of Appeals ruled that its sealed bearing pack design was not a trade secret. Hawg Tools, LLC v. Newsco Int’l Energy Servs. USA, Inc., 2016 COA 176M.

The Design of Sealed Bearing Packs For Mud Motors

Hawg Tools supplies and rents equipment used by oil and gas drilling companies. One of the tools supplied by Hawg Tools is called a mud motor, which is inserted into an oil well hole for drilling operations. One of the components in the mud motor is a bearing pack that allows a tubular shaft to turn the drill bit without friction. Bearing packs can be either wash bearing packs, which leave the bearings exposed to the surrounding drilling fluid, or sealed bearing packs, which are sealed to prevent fluid from entering the bearing assembly. Sealed bearing packs last for days whereas wash bearing packs last only a few hours. Consequently, the sealed packs permit drilling to continue longer before maintenance is required.

In 2008, Daniel Gallagher, the owner of Hawg Tools, arranged for a designer, Joe Ficken, to design the sealed bearing packs to be used in mud motors for one of Gallagher’s prior businesses. Gallagher did not request any special features or customizations for the sealed bearing packs. Ficken stated that the design was simple and took him only two days to complete. Through a series of assignments, all rights in Ficken’s design were assigned to Hawg Tools.

Hawg Tools Files Lawsuit For Misappropriation of Trade Secrets

In 2011, Ficken accepted a job at Newsco, an oil and gas drilling operation that also uses mud motors, where he was asked to design sealed bearing packs for Newsco’s use. In 2013, Gallagher discovered that Ficken had designed a sealed bearing pack for Newsco that was similar to the design he had assigned to Hawg Tools. Gallagher filed a lawsuit against Newsco and Ficken for misappropriation of a trade secret, as well as other claims, based on Newsco’s use of the similar sealed bearing pack design.

The case went to trial and a jury returned a verdict of $1.3 million in favor of Hawg Tools on its trade-secret claim, with additional damages awarded on other claims. The trial court denied defendants’ post-trial motions and the defendants appealed to the Colorado Court of Appeals.

Step One: Is It A Trade Secret?

The Court of Appeals determined that Hawg Tools had provided ample evidence at trial to establish that Newsco’s design of its sealed bearing pack was essentially the same as its own design. But the appellate court also found that Hawg Tools failed to provide sufficient evidence that its design was in fact a trade secret.

The Colorado Uniform Trade Secret Act defines a trade secret to include “the whole or any portion . . . of any . . . design . . . which is secret and of value.” The Court of Appeals thus looked at whether the design of Hawg Tools’ sealed bearing pack was in fact secret and not a matter of public knowledge or of general knowledge in the trade or business.

The Court acknowledged that a design may be a protectable trade secret if it includes a combination of elements in the public domain that is unique and the unified design or operation of those elements provides a business with a competitive advantage. However, if the design is not unique to the business, the publically known elements typically will destroy an attempt to characterize it as a trade secret.

In examining the evidence regarding the design of the sealed bearing packs, the Court found that Hawg Tools did not show that its design was different from other designs that were publically available at the same time. In fact, the Court noted that sealed bearing packs had been around since 1971. Evidence in the record showed that Hawg Tools’ design was “of public knowledge or of a general knowledge” in the mud motor manufacturing business. Therefore, the Court ruled that there was insufficient evidence that the design was secret. The Court overturned the jury’s verdict on the misappropriation claim, depriving Hawg Tools of the jury’s $1.3 million award. It is unclear whether Hawg Tools will seek review at the Colorado Supreme Court.

Lessons Learned

Trade secrets must be truly secret to be protected under trade secret laws. Businesses may utilize various legal means to protect confidential information that may not rise to the level of a trade secret, including using non-disclosure agreements and other contractual restrictions. But in order to allege a claim of misappropriation of a trade secret, the design, process, or formula at issue must not be in the public domain or known within the industry.

February 7, 2017

SEC Targets Severance Agreements That Impede Whistleblowers

By Mark Wiletsky and Brian Hoffman

The U.S. Securities and Exchange Commission (SEC) is cracking down on severance agreements that prohibit former employees from contacting regulators or accepting whistleblower awards under threat of losing their severance payments or other post-employment benefits. More and more, the SEC’s Enforcement Division has announced new cases filed against, and settlements made with, companies which restrict former employers from blowing the whistle through severance agreement clauses. Many of the scrutinized companies are not in the securities industry, and the problematic contract language is not as obvious as you may think.

Dodd-Frank Act Established Whistleblower Programs

The 2010 Dodd-Frank Act established whistleblower programs for the SEC as well as the Commodity Futures Trading Commission. Under the SEC’s whistleblower program, eligible whistleblowers who provide unique and useful information about securities-law violations to the SEC can collect significant awards of 10-to-30 percent of a penalty that exceeds $1 million.

Essential to the program, however, are the anti-retaliation provisions, which prevent whistleblowers from suffering adverse actions as a result of their whistleblowing activities. In addition, an SEC rule, Rule 21F-17, prohibits any action that impedes an individual from communicating with the SEC about possible securities violations. Rule 21F(h)(1) of the Dodd-Frank Act prohibits employers from taking retaliatory actions against whistleblowers who make protected reports.

Award Waivers, Confidentiality, and Non-Disparagement Clauses

Severance agreements often contain boilerplate language, occasionally including clauses that restrict a former employee from disclosing any confidential company information and disparaging the company or its officers and managers. Agreements also sometimes require that a former employee agree to waive any awards or monetary recovery should he or she file a complaint with a governmental agency. These severance provisions are exactly the type of restrictive language that the SEC has been targeting.

In its first whistleblower protection case involving restrictive language, in 2015 the SEC charged a global technology and engineering firm with a violation of Rule 21F-17. The company had required witnesses involved in internal investigations to sign confidentiality agreements that stated that the employee could face discipline or termination if they discussed the matter with outside parties without the prior approval of the company’s legal department. Because the investigations could involve possible securities-law violations and the clause prohibited employees from reporting possible violations directly to the SEC, the SEC found that the restrictive language in the confidentiality agreements impeded whistleblowers. The company agreed to pay a $130,000 penalty to settle the charges and voluntarily amend its confidentiality statements to add language to inform employees that they may report possible violations to the SEC and other federal agencies without company approval or fear of retaliation.

Recent SEC Cases Targeting Severance Agreements 

Additional whistleblower severance agreement cases highlight other clauses targeted by the SEC. In mid-2016, the SEC charged a building products company with using severance agreements that required former employees to waive their rights to a monetary recovery if they filed a complaint with the SEC or another government agency. The clause stated that the departing employee was required to waive possible whistleblower awards or risk losing their severance payments and other post-employment benefits. The company did not admit liability, but agreed to settle with the SEC for a $265,000 penalty.

Also in mid-2016, the SEC charged a financial services company for using language in agreements that restricted employees’ ability to disclose information to government agencies. Problematic wording included restricting any disclosure of confidential information, except when disclosure is required by law, in response to a subpoena, or with the company’s permission. (See also our prior client alert on the above three cases.)

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