Category Archives: Noncompete/Trade Secret

February 25, 2017

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

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.

May 4, 2016

New Federal Trade Secret Act: What Employers Need to Know

By Mark Wiletsky

In a rare bipartisan effort, Congress passed the Defend Trade Secrets Act (DTSA) that will allow an owner of a trade secret to bring a misappropriation action in federal court. For the first time, companies seeking to protect their trade secrets will be able to file civil lawsuits for misappropriation under the federal Economic Espionage Act. The new law will apply to trade secrets related to a product or service used in, or intended for use in, interstate or foreign commerce. President Obama is expected to sign the bill into law very soon.

Protection of Trade Secrets

Many companies rely on a secret formula, process, or technique for their success. Consider, where would Coca-Cola or Kentucky Fried Chicken be without their secret recipes? Under current law, companies seeking to sue for misappropriation of a trade secret must rely on each state’s trade secret law and pursue their lawsuits in state court. Prosecutors may file criminal actions under the federal Economic Espionage Act for theft of trade secrets, but that statute did not provide a mechanism for filing a private federal civil suit – until now.

The DTSA amends the Economic Espionage Act to permit private parties to bring a civil lawsuit in federal court alleging trade secret misappropriation. It provides certain remedies, including injunctions, damages, and an unusual provision allowing for the civil seizure of property in extraordinary circumstances. Although the DTSA does not replace state trade secret laws, it offers an additional enforcement venue for the protection of trade secrets.

DTSA Provides Access To Federal Courts, Injunctions, Damages, and Seizure of Property

Employers need to understand the primary components of the DTSA in order to take advantage of this new avenue to protect valuable proprietary information. First, the DTSA opens the doors of federal courthouses to those alleging an actual or threatened trade secret misappropriation. As with other areas of employment law where there is an overlap of state and federal law, plaintiffs may choose whether to bring a misappropriation claim in state or federal court, depending on which law offers the most protection, more favorable discovery and motion practice, and greater damages. Federal protection for trade secrets should lead to a more consistent approach on what is protected as a “trade secret,” what constitutes a misappropriation, and what remedies are available. More predictable discovery and motion practice under federal court rules should help streamline costs while offering more uniformity in litigation across jurisdictions.

Second, the DTSA tries to balance the need to bolster protection of valuable trade secrets against the right of employee mobility by allowing for injunctions, but only in limited circumstances. Employers can seek an injunction to prevent actual or threatened misappropriation of a trade secret by an employee on terms that the court deems reasonable, as long as it does not prevent a person from entering into an employment relationship or circumvent state laws regarding restraints on employment, such as state non-compete laws. An injunction will not be granted based “merely on the information the person knows” but instead, must be based on evidence of threatened misappropriation.

Third, federal courts may award damages caused by the misappropriation of a trade secret, to include damages for actual loss, for any unjust enrichment not addressed in the damages for actual loss, or the imposition of a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret. For a willful and malicious misappropriation, federal courts may award double damages and reasonable attorney’s fees. Courts also may award reasonable attorney’s fees to the prevailing party if a claim of misappropriation is made in bad faith, or a motion to terminate an injunction is made or opposed in bad faith.

In a unique provision, the DTSA allows the right to seek a civil seizure of property, but only in extraordinary circumstances. In such cases, a court may order the seizure of property when necessary to prevent the use or dissemination of the trade secret. If, however, the seizure is wrongful or excessive, the DTSA allows the individual whose property has been seized to sue for damages suffered as a result of the unlawful seizure. My colleague, Teague Donahey, provided an excellent summary of the DTSA and its seizure provisions in a recent article.

Safe Harbor For Whistleblower Disclosure of Trade Secrets

The DTSA offers safe harbor to individuals who disclose trade secrets to the government to investigate potentially illegal activity. Whistleblowers are granted civil and criminal immunity if they disclose a trade secret in confidence to a federal, state, or local government official, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law, or as part of a lawsuit or other proceeding when the disclosure is made under seal.

The new law also protects limited disclosure of trade secrets when an employee files a retaliation claim based on reporting a suspected violation of law against an employer. The employee must make such disclosures under seal and must not disclose the trade secret except pursuant to court order. Note that an “employee” is defined under the whistleblower immunity provision to include “any individual performing work as a contractor or consultant for an employer,” a broader definition than most other employment laws.

This immunity for use of trade secret information in an anti-retaliation lawsuit must be included in any contract or agreement that governs the use of trade secrets and other confidential information. Alternatively, employers may provide a cross-reference to a policy document that is provided to the employee that specifies the employer’s reporting policy for a suspected violation of law. Failure to comply with the notice requirement will result in the employer losing the ability to recover double damages and attorneys’ fees against the employee that might otherwise be available.

What You Should Do Now

If you use confidentiality or non-disclosure agreements that are designed to protect company trade secrets, review and revise future agreements to incorporate the DTSA’s whistleblower immunity notice. You’ll also want to consider expanding the venue language in your agreements to be sure you don’t exclude pursuing enforcement of the agreement in federal court.

If faced with a potential misappropriation of trade secrets, discuss with your legal counsel whether your state’s trade secret law or the new federal law (assuming it is signed into law) would provide the best enforcement mechanism. The DTSA provides an important avenue for increased protection of trade secrets but in some circumstances, state court may remain your best option.

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March 23, 2016

Idaho’s Non-Compete Law Set to Enhance Employer Enforcement

By A. Dean Bennett

Idaho businesses will have an easier time enforcing non-compete agreements that restrict key employees and independent contractors from engaging in post-employment competition, thanks to a bill passed by the Idaho legislature this week. HB 487 provides that if a court finds that a key employee or key independent contractor breaches a non-compete agreement, a rebuttable presumption of irreparable harm is established. The burden of overcoming that presumption shifts to the former employee to show that he or she has no ability to adversely affect the employer’s legitimate business interests. The bill was sent on Tuesday to Governor Otter, who is expected to sign it into law.

Pro-Business Non-Compete Provision

While some neighboring states, such as Utah, have passed legislation to restrict the use of non-competes and other post-employment restrictive covenants, Idaho has strengthened its non-compete law in favor of protecting employer rights. Not without controversy, this bill reportedly grew out of a recent lawsuit filed by LeapFox Learning, a Meridian computer training company, against its former business director. LeapFox Learning’s owner, Codi Galloway, reportedly testified before the Idaho Senate and Human Resources Committee, that after her former business director left to work for a competitor, she lost customers, vendors, and contractors as a result of that ex-employee’s use of LeapFox Learning’s company’s contact lists and marketing and business strategies.

Tough Burden For Employees To Overcome

Opponents of the bill argued that it infringes on an employee’s ability to change jobs and move to a better position or even start his or her own company. In addition, by placing the burden to rebut the presumption of irreparable harm on the former employee, it essentially forces the employee to prove a negative, namely that he or she cannot harm the former employer’s business. Assistant Chief Deputy Brian Kane is quoted in the Idaho Statesman as saying, “The burden necessary to overcome this presumption may be extremely difficult, if not impossible.”

Proponents, however, reply that the presumption of irreparable harm applies only to non-competes of key employees or key independent contractors, which are defined as the highest paid five percent of employees or independent contractors. Consequently, the amendment will not change enforcement proceedings for non-competes involving lower level employees.

Review Non-Competes For Idaho Compliance

To take advantage of numerous rebuttable presumptions contained in Idaho’s non-compete law, employers should review their non-competes to make certain they do not exceed the time, geographic, and business scope parameters deemed reasonable under the law. In particular, review section 44-2704 of the Idaho Code or consult with competent legal counsel to ensure your restrictive covenants protect your business assets in the best way possible.

If you have any questions about the new bill, or your company’s non-compete agreements, contact Dean Bennett atadbennett@hollandhart.com or 208-383-3993.

March 11, 2016

Utah Non-Compete Bill Passes In Scaled-Back Form

By Bryan Benard

After six weeks of significant discussions with Utah legislators and business leaders involving numerous compromises, late Wednesday night both houses of the Utah legislature passed a significantly scaled-back bill restricting the duration of non-compete agreements in the State. The new law will apply to any post-employment restrictions created on or after May 10, 2016, but it does not affect current agreements.

One-Year Limitation on Non-Competes

While the original bill intended to ban non-compete agreements entirely, the compromised bill’s most significant impact is that it limits the length of any Utah non-compete restrictions to one year after employment ends. Any post-employment restrictions on competitive activity longer than one year will be void.

Importantly, there are exemptions from the one-year limit for non-solicitation provisions, non-disclosure and confidentiality agreements, and non-competes related to the sale of a business. The bill retains the common-law standard that restrictive covenants must be reasonable in geographic or market scope in order to be enforceable.

Employers Now Required to Pay Attorneys’ Fees if They Try To Enforce Unenforceable Non-Competes

Another significant provision of the bill is the imposition of costs: if an employer tries to enforce a post-employment restrictive covenant, through arbitration or by filing a civil action, and the restriction is found to be unenforceable under this law, the employer will be liable for the employee's costs associated with arbitration, attorney fees and court costs, and actual damages. The bill sponsors intended this provision to eliminate “bad-actor” employers who try to enforce unreasonable restrictions. Employers should revisit their post-employment restrictive covenants, ensure their reasonableness, and be wary about this attorneys’ fees penalty provision moving forward.

Compromises Led To Final Bill

This scaled-back version of the bill is vastly superior for Utah employers than the original bill introduced in early February. The original bill would have entirely prohibited most types of post-employment restrictions. We are proud of the pivotal contributions by our labor and employment attorneys, Bryan Benard and Cecilia Romero, and our government affairs team of Kate Bradshaw and Amanda Smith, in working toward the final version of the bill. Our team had daily contact with the bill sponsors, played a key role on important negotiating teams with the Chamber, the Governor's Office of Economic Development, the Business Coalition, and the Utah Technology Council, and provided valuable testimony at the committee hearings. Representative Mike Schultz, the primary sponsor, was very open to suggestions, accessible, and willing to understand and incorporate business concerns. Thanks to these efforts, Utah employers still have the ability to limit competitive activities after the termination of employment for valid reasons.

If you intend to use non-compete agreements or impose other post-employment restrictions on certain employees, take time now to review those agreements and provisions to ensure they will be enforceable under Utah’s new non-compete law. Again, this law will affect any agreements entered into after May 10, 2016. As always, if you have questions about the effect of this new law on your business, please contact me or your regular Holland & Hart attorney at 801-799-5800.

February 3, 2016

Utah Bill Seeks To Ban Post-Employment Non-Compete Restrictions

By Bryan Benard

On February 2, 2016, the Post-Employment Restrictions Act, H.B. 251, was introduced in the Utah House of Representatives. Sponsored by Representative Mike Schultz (R), the bill would prohibit most types of agreements and policies that restrict an employee’s actions after termination of employment.

Specifically, the bill would ban post-employment restrictions that restrict the employee from:

providing products, processes, or services that are similar to the employer's products, processes, or services;
working in the same industry as the employer, or
owning, either directly or indirectly, an interest in an entity that provides products, processes, or services that are similar to the employer's products, processes, or services.

In short, this bill would prevent Utah employers from having non-compete agreements with its employees that extend beyond the termination of the employment relationship.

We will continue to monitor this bill, with our government affairs group keeping close tabs on it.

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September 2, 2015

Utah Supreme Court: Misappropriation of Trade Secrets Presumes Irreparable Harm

By Bryan Benard

A Utah employer has dodged a $229,482 fee award and can continue its lawsuit against a former employee for misappropriation of company trade secrets and violation of a non-disclosure agreement. The Utah Supreme Court recently revived InnoSys, Inc.’s claims against a former engineer, Amanda Mercer, holding that the company established a prima facie case of trade secret misappropriation that gave rise to a rebuttable presumption of irreparable harm. The divided Court reversed the grant of Mercer’s summary judgment motion, allowing the company to take its claims to trial. InnoSys, Inc. v. Mercer, 2015 UT 80.

Employee Copied Sensitive Company Information to Thumb Drive and Personal Email Account

During her employment as an engineer for InnoSys, Mercer forwarded confidential company emails to her personal Gmail account. On the day that she was terminated for poor performance, Mercer copied the company’s confidential business plan onto a thumb drive.

Following her termination, Mercer filed a claim for unemployment benefits with the Utah Department of Workforce Services. After her claim was denied, she appealed, submitting a number of protected documents, including the confidential business plan and protected emails, into the administrative record. At that point, InnoSys began asking for details as to when and how she gained access to the confidential materials. Mercer then deleted all of the emails and InnoSys files. InnoSys filed a complaint in court, alleging that Mercer had breached her non-disclosure agreement (NDA), misappropriated company trade secrets in violation of the Uniform Trade Secrets Act (UTSA) and breached her fiduciary duty to the company.

Employee Changed Her Story But Still Won Judgment From Lower Court

Throughout discovery, Mercer changed her story regarding the use of her Gmail account and the timing of her acquisition of the company’s confidential business plan. Despite first claiming that she had IT’s permission to transfer company emails to her personal Gmail account, Mercer later admitted that she did not have anyone’s permission to do so. As to the business plan, Mercer initially testified in her deposition that she had copied the business plan onto a thumb drive because she had been asked to review the plan the day before her termination and was unable to access it via the company’s secure remote network. She later admitted that she copied it on the day of her termination and did not have it in her possession the day before she was fired.

Despite Mercer’s inconsistent statements regarding how she obtained the company’s confidential information, the district court ruled in Mercer’s favor on all of InnoSys’s claims. It did so after concluding that “there was no objectively reasonable basis to believe that Mercer had harmed InnoSys or was threatening to do so.” In addition to dismissing all of InnoSys’s claims against Mercer, the lower court also granted Mercer’s motion for sanctions against InnoSys and to collect attorneys’ fees as the prevailing party. The court ordered InnoSys to pay Mercer $229,481.58. InnoSys appealed.

Evidence of Harm

At the crux of the appeal was whether InnoSys needed to provide sufficient evidence of harm or threatened harm as a result of Mercer’s misappropriation and/or disclosure of company trade secrets to avoid summary judgment and proceed to trial. The lower court had found that InnoSys had not presented sufficient evidence that it had been harmed by Mercer’s admitted taking and disclosure of confidential company information and therefore, could not support its claims.

The Utah Supreme Court disagreed, holding that where a company establishes a prima facie case of misappropriation of trade secrets under the UTSA, it is entitled to a presumption of irreparable harm. The company was not required to produce evidence of financial damages as it also sought an injunction to prevent Mercer from further disclosing or using its confidential information.

The presumption of irreparable harm, as well as affirmative evidence of threatened harm, was also enough to keep alive the company’s claim for breach of the NDA. By reversing the grant of summary judgment in Mercer’s favor, the Court overturned the award of sanctions and attorneys’ fees against InnoSys.

Lessons Learned

First, put procedures in place to retain all signed employee agreements and documents. InnoSys initially could not find the NDA that Mercer had signed when her employment began. The lower court was hard on the company for that failure, and did not want to accept a copy of its standard NDA as evidence of what Mercer signed. The company eventually found the NDA signed by Mercer but the turmoil caused by its absence highlights the importance of strict record keeping for important employee agreements. Be certain to keep your signed agreements and acknowledgments in a secure location. You never know when you might need to enforce them.

Second, when employment ends for any reason, take steps to ensure that the departing employee returns all company information and property without retaining any copies. It is unclear from the opinion whether InnoSys asked Mercer for the return of any company materials when she was fired but it appears that it learned she had confidential company information after she submitted the company documents as part of her unemployment appeal. Don’t wait until after there has been a disclosure or further misappropriation but instead, proactively cut off access to company materials and seek the return of all company property. And remind departing employees of their continued obligations under confidentiality policies and NDAs.

Finally, enforce your NDAs to ensure continued protection of your company trade secrets and other proprietary information. Allowing a former employee to retain or disclose confidential information will undermine your future chances of arguing that such information is indeed a trade secret. You must continually guard that information or it will lose its protected status.

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November 17, 2014

When Key Employees Go To A Competitor

By Mark Wiletsky

Your executives and top salespeople have access to your most valuable business strategies, sales contacts, growth plans and innovations. What do you do when one (or more) of your key employees leaves to work for a competitor? Without the correct agreements in place to protect your proprietary information, you may have little recourse.

Don’t Rely on a Court to Protect Your Business Information

When a key employee leaves to go to a competitor, the former employer often scrambles to seek a court injunction to prevent the employee from working for the competitor and to stop the employee from disclosing or using trade secrets and confidential information. But courts are not always willing to prevent an employee from moving on, especially if the company does not have a reasonable and otherwise enforceable non-compete agreement in place.

In a recent case in Colorado, a high level executive used his company-issued laptop to send an email containing his business contacts to his personal email address as he began negotiating to work for a competitor. He also downloaded some business information onto a personal external hard drive and thumb drive and kept physical copies of certain business documents in a box in his car. About three weeks later, the competitor hired the executive.

There was no evidence that the competitor requested or obtained from the executive any confidential information, the executive had signed only a nondisclosure agreement with his former employer, and the executive agreed to an injunction preventing him from using his former employers confidential information or trade secrets. Nevertheless, the former employer asked the federal court in Colorado to prevent the executive from working as the competitor’s President for one year, arguing that he had threatened or would inevitably disclose its trade secrets in his new job. Despite the executive’s decision to transfer information to his personal devices just before leaving the company, the court denied the company’s request, citing a lack of evidence that the executive had or would use his former company’s trade secrets to its competitive disadvantage. Cargill Inc. v. Kuan, No. 14-cv-2325 (D.Colo. Oct. 20, 2014). The judge noted that enjoining the executive from working for the competitor would, in effect, afford his former employer something it could have obtained or bargained for: a covenant not-to-compete.

Employment-Related Agreements to Consider

Keeping proprietary information confidential can be key to the future prosperity and competitiveness of your business. You can help protect that information from walking out the door by having key employees sign one or more of the following agreements:

Non-compete agreement: the restriction on working for a competitor must be reasonable in time and geographic scope, and comply with other applicable state law requirements;
Confidentiality agreement: requires employees to keep secret your company’s trade secrets and other proprietary information;
Non-solicitation agreement: restricts an employee from soliciting customers (who must be defined in the agreement) or from soliciting other employees to go to work elsewhere; and
Assignment of inventions: any products, inventions, innovations and other developments created during the worker’s employment are assigned to and owned by the company.

Depending on the circumstances, you may want to incorporate some or all of these provisions into a single agreement, and you may need to address varying state law requirements (or choice of law and venue issues) depending on where your employees are located. However, be careful to tailor your agreements to each type of key employee. For example, the non-compete for your CEO or general manager may need different restrictions than a similar agreement for your Regional Sales Manager. And be sure not to use a non-compete with all employees—including lower level ones who have no need for such post-employment restrictions—because it will diminish your justification for asking a higher-level employee to sign the same or similar agreement.

The bottom line is that you need to be proactive in protecting your vital assets, including your confidential information and your key employees. Taking steps now to implement proper agreements will go a long way in protecting your business down the road when key employees decide to depart.

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