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Non-Compete Blog

Companies in competitive niche industries use non-compete agreements and other forms of restrictive covenant agreements to protect their trade secrets and limit the ability of their employees to work for a competitor. But what happens when one competitor aggressively recruits employees from another? Can those efforts be so targeted and intense that they give rise to a claim of unfair competition? No, ruled SDNY Judge Paul Crotty in Creative Circle v. Susan Norelle Bortone, et. al., SDNY Case No 18:7333.

Until just this past Wednesday, May 11, 2016, when President Obama signed into law the federal Defend Trade Secrets Act (the “DTSA”), employers had limited access to the federal courts when their trade secrets were misappropriated.  The DTSA changes that in dramatic fashion.  In an historic shift, this new statute (which, despite today’s political climate, passed the House 410-2) allows employers to file a civil suit in federal court for theft of trade secrets and obtain injunction relief against the misuse of those secrets, as well as damages and attorneys’ fees.  The law also allows, in extraordinary circumstances, a court to order the ex-parte seizure of trade secrets by law enforcement to prevent their propagation or dissemination. The result is that the DTSA will radically alter trade secret litigation. While non-competes and breach of non-solicitation cases will continue to be litigated primarily in state court, trade secret litigation will likely shift to the federal courts. Note, though, that the DTSA does not preempt state law, and thus many DTSA cases filed in federal court will contain multiple causes of action, including state law unfair competition tort claims and claims for breaches of non-solicit and non-compete provisions.

Lex Machina, a Silicon Valley-based legal data analytics firm now owned by LexisNexis, recently published its first Trade Secret Litigation Report. Drawing statistics from about 800 or so federal district court cases, presumably brought via statute and diversity, the report by the legal data analytics firm examines a number of case-related metrics.[1] While the lack of detail somewhat limits the report’s utility, the report does provide some useful information about case timing and win/loss statistics. Trade Secret Litigation Report 2018 (Lex Machina, July 2018).

The regulation of restrictive covenants seems to be moving from the courtroom to the statehouse. While some states have enacted laws to codify non-competition laws that favor businesses in its effort to sustain such agreements (e.g., Florida, Georgia, Wisconsin, etc.), activity in recent months indicate a counter-trend: legislation to limit employers’ use of non-compete agreements- an unsurprising result given much of the negative press about non-competes and the White House’s May 2016 report criticizing their overuse. [1]

The defection of a team of high-level executives to a competing business is a crisis for almost any company. Savvy businesses can try to mitigate the effects of such departures by entering into restrictive covenants, including non-competition and non-solicitation agreements, with their high-level employees. However, as a recent New York restrictive covenant case illustrates, courts remain skeptical of agreements that excessively restrict the freedom of employees to move between jobs.

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