For a deeper analysis of the CHOICE Act and its implications, read our full client alert on this legislation here.

Several topics were key takeaways for us. We last wrote on the nuances of joint representation of an onboarding employee and the hiring company. Another key topic that should be a key consideration for companies protecting trade secrets is the theft of company information and forensics.

Theft of Company Information and Forensics

Theft of company information has become a technological artform. A study referenced during the AIPLA was performed by the Ponemon Institute. The study found that over 60 percent of companies polled had experienced attempts to steal proprietary information. With this as a backdrop, there does not appear to be any question that companies large and small should be taking action to protect their valuable information from theft. Based on experience, the low hanging fruit for finding evidence of information migration outside of the organization is email, removable media, printed materials, remote network access, file transfer, downloads to laptops, and now a fan favorite, screen shots from an alternative device (which can be very difficult to detect without obtaining the device used). When an employee is offboarding, it is crucial to take inventory of all electronic equipment to be left behind inclusive of external storage devices. There is no better time than at the exit interview to discuss every device utilized by the employee and the return of those devices. It is also crucial to obtain credentials to any company device being returned and passwords to any cloud-based accounts used the by the exiting employee.

These steps may seem self-evident and, in some cases, may seem to come across as accusatory, but gathering this information once the individual is off at another place of employment is very difficult if not impossible to accomplish. If there is any inkling of suspicion: 

1. A company should engage in a multi month look back at email traffic to determine if there is any suspicious activity. 
    
2. If suspicious activity is found, calling upon forensic experts to run full evaluations of all returned devices typically provides a picture that leads to a full throttle approach to retrieving stolen information or to a level of comfort that the exited employee has left all proprietary information behind. 

In any trade secret investigation, there is little question that utilizing third party forensic experts will provide a court with a level of confidence necessary to justify entry of restraining orders and ultimately injunctive relief intended to retrieve, prevent use of propriety information, and to cease any potential damage coming to fruition.  

The foregoing was a common theme amongst many presenters at the conference and excellent guidance for practitioners and their clients. 

Hearing firsthand how companies handle these issues reinforced just how vital it is to stay proactive and ahead of the curve. Our team has put together a series of key take aways from the event that may help companies to guard against unfair competition and trade secret theft. Our first topic for consideration is joint representation. 

Joint Representation  

Representing an onboarding employee and the company concerning the hiring of the individual can be a tricky proposition. There are good reasons for engaging in a joint representation with proper warnings and there are definite pitfalls. 

One of those pitfalls is the appearance that the new employee and the new employer are joined at the hip relating to the conduct of the employee exiting a former employer (especially if the former employer is a direct competitor). When this situation occurs, the first step is to review the representation from an ethical standpoint under existing Ethics and Professionalism rules. 

It is considered ethical to simultaneously represent multiple clients whose interests may not ultimately be aligned if the law does not prohibit the representation and if no client asserts a claim against any other client involved in the proceeding. 

1. First things first—obtain an acknowledgement from the new employee that there is no restrictive covenant impeding the employment, the employee has exited his former company without any trade secret/confidential/proprietary information, and the employee has not destroyed or spoliated any information that belongs to the former employer. 
    
2. If these factors check out, proceed cautiously with the caveat that if it is learned that the acknowledgement is false, representation of the employee will end and representation of the company will continue. In this type of situation, informing each party of the risks of dual representation is key to continued representation of the company when bad facts present themselves. This is not to say that disqualification may still occur, particularly if privileged information obtained from the onboarding employee could assist the employer in defending any claims.   

A key case to review before undertaking any dual representation is Upjohn v U.S, 449 U.S. 383 ( 1981).   

Charles Schwab alleges that Roberto Ivan Ortega misappropriated its trade secrets and client information to solicit the business of former customers after joining a competitor. After Ortega refused Schwab’s requests to return its information, Schwab filed suit and moved for a preliminary injunction preventing the use or disclosure of its information. 

Faced with the reality that a court would likely enter an injunction, Ortega’s counsel agreed to an injunction that prohibited Ortega from using, disclosing, or disseminating Schwab confidential information or soliciting Schwab customers. Ortega is also required to give Schwab access to his computing devices for Schwab to conduct discovery to uncover the scope of the misappropriation. 

​Courts continue to stress the need to maintain the status quo in cases involving the theft of information. Employers must take the necessary steps to prevent the theft of their information and in the cases where their information has been taken, prevent the use or disclosure of that information by filing a lawsuit and seeking an injunction. 

While the recent nuclear verdicts have mainly been in personal injury situations, this highlights risks associated with theft of trade secret information. This also highlights the need to perform internal audits on protection of sensitive information. A key to protecting valuable information is taking proactive steps to restrict access to certain proprietary information, including designs of products not readily available in the public setting. 

Click here to read more on this ruling.

Employers should review and, if necessary, revise their employee non-solicitation provisions to make sure they comply with the finding in this case.  

Click here to read more on this case.

On August 20, 2024, Judge Ada Brown of the US District Court for the Northern District of Texas set aside the Federal Trade Commission’s rule that effectively prohibited the use of non-compete agreements. Interpreting the Administrative Procedure Act, which provides for judicial review of the actions of federal agencies like the FTC, the court found that the FTC’s non-compete ban was unlawful.

First, the court found that the non-compete ban was a result of the FTC overreaching its congressionally delegated authority. In short, the court believed that the FTC does not have the authority to issue substantive rules regulating unfair competition, such as its ban on non-compete agreements. Second, the court found that the non-compete ban was arbitrary and capricious. To the court, the ban was overly broad, and the FTC did not provide sufficient explanation to justify the ban’s expansive effects. The court also reasoned that the FTC had failed to consider less drastic alternatives.

Ultimately, the court concluded that the FTC’s non-compete rule was unlawful and set it aside. The court rejected the FTC’s argument that the court’s holding should apply only to the parties of the lawsuit, and instead held that the FTC is prohibited from enforcing its rule nationwide.

In the past year, momentum seemed to be building for the FTC to effectively end the use of non-compete agreements. This decision stopped any such momentum in its tracks. For now, at least, non-compete agreements continue to be governed by laws of the states without any overriding federal rules. Employers should, however, continue to monitor the FTC’s efforts to regulate in this space and ensure that their non-compete agreements comply with existing state and local laws.

Key Takeaways

• A federal judge in Texas set aside the Federal Trade Commission’s rule that would have effectively banned non-compete agreements.
• This ruling applies nationwide. Therefore, employers using non-compete agreements can rest easy — for now at least — knowing that their non-compete agreements are not categorically banned by the FTC rule.
• Employers should still vet their non-compete agreements to ensure compliance with state and local laws.

As previously reported, the US District Court for the Northern District of Texas issued an injunction prohibiting the Federal Trade Commission (FTC) from enforcing its non-compete ban, which is set to take effect on September 4. That ruling, however, was limited to the plaintiffs in that case. Similarly, the US District Court for the Eastern District of Pennsylvania had a request before it and denied issuing an injunction against the FTC. It found that the plaintiff, ATS Tree Services, LLC, could not show irreparable harm, but, more importantly, it also found that plaintiff failed to show a likelihood of success on its claims that (1) the FTC does not have authority to issue a nationwide non-compete ban, and (2) the FTC Act unconstitutionally delegates legislative power to the FTC. The Pennsylvania court’s decision on “likelihood of success” is at odds with the finding of the Texas district court, which is an indication that the fate of the FTC non-compete ban will likely be resolved by the federal appellate courts and potentially the US Supreme Court. The Texas district court is scheduled to issue a final decision in the case on August 30, which could negate the non-compete ban for all employers — at least until the appeals courts and the Supreme Court have a say in the matter. 

If you have questions regarding the effects of these decisions on your non-compete agreements, please contact a member of our trade secret team.

With large swaths of the workforce working remotely, some employers have growing concerns about employee productivity, as well as information security and confidentiality. In today’s remote work era, organizations face significant challenges in balancing employee monitoring with safeguarding confidential information and trade secrets. This article explores key insights and strategies for HR professionals navigating these complex issues.

Privacy Concerns and Compliance

Ensuring compliance with privacy laws and the Fair Labor Standards Act (FLSA) while monitoring remote employees is paramount. Organizations must have clear policies in place for handling employees who have access to confidential information. This includes establishing standalone non-disclosure agreements (NDAs) and fostering a culture that prioritizes the protection of trade secrets, even in remote work settings.

Legal Considerations and Challenges

Legal complexities arise when monitoring employees who use personal devices at home. While employers can monitor company-owned devices and accounts, they must inform employees about the lack of privacy in these spaces. It’s essential to mitigate potential invasion of privacy claims by having employees acknowledge the absence of privacy expectations on company computers and email accounts through signed acknowledgments.

Handling Employee Privacy in Virtual Meetings

Managing employee privacy during virtual meetings is crucial. Best practices include documenting sensitive information disclosed during video calls and implementing virtual backgrounds to prevent inadvertent disclosures, thereby safeguarding employee privacy and maintaining confidentiality.

Protecting Trade Secrets in Remote Work Environments

Safeguarding trade secrets remains a critical challenge, especially when hiring employees from competitors. Organizations must proactively plan for the termination of employees with access to sensitive information and monitor communications for signs of data theft. Despite the shift to remote work, traditional methods of transmitting information, such as email and external drives, continue to pose risks.

Policy Recommendations and Compliance Strategies

To mitigate risks, organizations should implement comprehensive policies such as confidentiality agreements, non-competition agreements, and guidelines for cellphone usage among employees handling confidential information. Regular training sessions and fostering a corporate culture that values information security are essential for demonstrating diligence in protecting trade secrets.

Hiring from Competitors and Non-Compete Agreements

Navigating the complexities of hiring employees from competitors requires careful consideration of non-compete agreements and legal implications. Consulting with legal counsel is advisable to ensure compliance and prevent unintentional misuse of trade secrets, which could lead to severe legal consequences.

Conclusion

While remote work offers flexibility and efficiency gains, it also demands heightened vigilance in protecting confidential information and trade secrets. By implementing clear policies, conducting regular training, and fostering a culture of security awareness, organizations can effectively navigate these challenges while safeguarding intellectual property and maintaining legal compliance.

For further insights, listen to our HR Works podcast episode on this crucial topic here.

As previously reported, the consolidated lawsuits challenging the Federal Trade Commission’s (FTC) non-compete ban sought a preliminary injunction and a stay until litigation is resolved concerning the FTC’s non-compete ban. On July 3, 2024, a federal judge in the US District Court for the Northern District of Texas decided that a preliminary injunction was appropriate and temporarily enjoined the non-compete ban from going into effect. It is important to note, however, that the court declined to issue a nationwide injunction to nonparties of the suit. In other words, the FTC’s non-compete ban is still set to take effect on September 4, for any employer that is not a party in the Ryan, LLC vs. The Federal Trade Commission lawsuit.

In its opinion, the court reasoned that the non-compete ban is likely unlawful because (1) the ban would be arbitrary and capricious since it is overly broad and not supported by the administrative record and (2) the FTC does not have substantive rulemaking authority and has exceeded its statutory authority by creating a ban for unfair methods of competition.

The court will issue a final decision on the merits of the lawsuit on August 30, likely resulting in a nationwide injunction that would extend to all nonparties of the suit. This decision will come just a few days ahead of the September 4 effective date for the non-compete ban. However, it is possible that a nationwide decision will be reached before August 30 due to a challenge to the rule in a Pennsylvania federal court, which is set to reach a decision on July 23.

If you have questions regarding your non-compete agreements, please contact a member of our trade secret team. 

Original post from May 13, 2024:

As previously reported, there were two lawsuits filed to challenge the Federal Trade Commission non-compete ban. Those cases are now essentially consolidated in the US District Court for the Northern District of Texas. The court recently issued an order setting a briefing schedule on the Motion to Stay the Effective Date and Preliminary Injunction (this motion seeks to stay the Final Non-Compete Rule until the litigation is resolved). 

According to the plaintiff’s motion, there are several reasons that the court should stay the effective date and issue a preliminary injunction, including (1) unrecoverable costs associated with the time and attention needed to review all existing non-compete agreements and notify existing and former employees that they are no longer bound; (2) unrecoverable costs associated with the risk of loss of employees, client relationships, and confidential information; and (3) the need, if the rule is later found to be unenforceable, for employers to decide whether to enforce non-compete agreements against employees who left the employer for a competitor in the belief that the non-compete agreement was invalid (thus, forcing the employee to leave their new job).

According to the court’s order, a decision on that motion will be made by July 3, 2024.