Non-Compete Runs From End of Employment Agreement’s Term, Louisiana Appellate Court Holds

By Jones Walker LLP on July 17, 2014 Posted in Non-Compete

A Louisiana appellate court recently decided that a non-competition agreement was unenforceable. But not because it contained unreasonable geographic or temporal restrictions or failed to strictly comply with Louisiana’s non-compete statute. Instead, the court found that the non-competition obligations had already expired during employment. That is, even though the employee continued to work for the company after the expiration of the specified term of his employment agreement, the court found that the non-compete period began to run from the end of the employment agreement’s term—not from the end of the employee’s continued service.

The Louisiana Court Decision

In Gulf Industries, Inc. v. Boylan, (La. App. 1st Cir. June 6, 2014), an executive officer for a company worked under a written employment agreement that provided for a one-year employment term and for a two-year non-period that was to run from the date of his “last services.” The executive officer continued to work for the company for slightly over two years after the term of his employment agreement expired, then quit to form a competing company of his own. Louisiana’s First Circuit Court of Appeal held that the executive officer had become an at-will employee at the conclusion of the employment agreement term, and the two year non-compete period had started to run at that time. Consequently, the former employer could not obtain an injunction against the former executive officer.

Additional facts complicated the court’s analysis somewhat. After the term of the employment agreement, but while the executive officer continued to serve, a new owner purchased a majority interest in the company. The buyer had the executive officer sign the purchase agreement as a key employee. The purchase agreement included a schedule that listed the executive officer as one of the company’s employees under “Employment Agreements (Incl. Non-Compete Agreements).” Shortly before the transaction closed, the executive officer also went back and initialed the pages of an exhibit to his old employment agreement that listed the territories in which he could not compete.

The company argued that these additional facts showed that the executive officer had agreed to extend the terms of his employment agreement. Extension of the employment agreement would have meant that the non-compete agreement continued to bind the executive officer. The executive officer countered this evidence by testifying that he had no such intention. The court agreed with the executive and held that the company did not bear its burden of proving an extension of the agreement.

The Take Away

Louisiana, like many states, requires that non-compete and non-solicitation agreements meet precise requirements if they are to be enforced and will interpret the language in those agreements strictly. Employers trying to enforce non-compete agreements face a strong public policy that disfavors such agreements and that demands strict adherence to the statutory or common law requirements. Additionally, as this case demonstrates, courts can look to other provisions within those agreements to decline granting the requested relief. Employers need to pay close attention to the requirements, as well as all contractual provisions that could allow a court to decline enforcement. It’s a sound business practice to periodically review non-compete agreements—and involve experienced counsel in the process. Minor revisions could add major value.

Can You Go Too Far in Protecting Trade Secrets?

By PJ Kee on July 10, 2014 Posted in Confidential Information, Data Protection, Employee Monitoring, Trade Secret, Uncategorized

This post was originally published as an article in Volume 23 of the Louisiana Employment Law Letter.

The U.S. Fifth Circuit Court of Appeals in New Orleans recently held that an employer’s policy for protecting its confidential and proprietary information was unlawful under the National Labor Relations Act (NLRA). Specifically, the Fifth Circuit held that a broad confidentiality policy – even one protecting valuable trade secrets – violates the NLRA if it reasonably tends to chill employees’ protected rights to discuss wages. This is an unfortunate ruling for employers who are trying to implement policies to keep their trade secrets, well, secret. But, it also provides a framework for employers to revise their confidentiality policies to exclude any suggestions that employees cannot discuss their wages and to avoid a similar result.

The Confidentiality Policy And The Dispute

A trucking operation that relies on employees to transport frac sand to oil and gas well sites required its employees to sign an acknowledgement regarding the company’s confidentiality policy. It provided:

Confidential Information

Employees deal with and have access to information that must stay within the Organization. Confidential Information includes, but is not limited to, information that is related to: our customers, suppliers, distributors; Silver Eagle Logistics LLC organization management and marketing processes, plans and ideas, processes and plans, our financial information, including costs, prices; current and future business plans, our computer and software systems and processes; personnel information and documents, and our logos, and art work. No employee is permitted to share this Confidential Information outside the organization, or to remove or makes copies of any Silver Eagle Logistics LLC records, reports or documents in any form, without prior management approval. Disclosure of Confidential Information could lead to termination, as well as other possible legal action.

In 2010, an employee filed a charge with the National Labor Relations Board (NLRB) after being fired. She alleged that the employer’s confidentiality policy was an unfair labor practice because it was tantamount to a workplace rule that prohibited employees from discussing their wages. The alleged violation stemmed from the inclusion of “personnel information and documents” within the definition of “Confidential Information.” She complained that there was no was explicit exclusion permitting wage discussions.

The NLRB’s Decision

An administrative law judge (ALJ) was the first to find that company’s policy violated its employees’ protected rights. The ALJ acknowledged that the policy did not refer to wages or any other employment terms. Nevertheless, the ALJ found that the policy was overly broad and that employees could reasonably interpret the language as forbidding discussions on wages and other terms of employment.

The employer requested review of the ALJ’s decision, but a split panel (2-1) of NLRB board members affirmed the ALJ’s decision. The majority found that the “context of the overall confidentiality rule here does nothing to remove employees’ reasonable impression that they would face termination if they were to discuss their wages with anyone outside the company.” The majority continued: “Not only does nothing in the rule suggest that ‘personnel information and document’ excludes wages, one of the other categories—‘financial information, including costs’—necessarily includes wages and thereby reinforces the likely inference that the rule proscribes wage discussion with outsiders.” Accordingly, the majority found that the confidentiality policy was an unfair labor practice under the NLRA. Flex Frac Logistics, 358 N.L.R.B. 127 (2012).

The Fifth Circuit Decision

The employer’s losing streak continued, with the Fifth Circuit affirming the NLRB’s majority decision. The Fifth Circuit began by explaining that, under Section 8(a)(1) of the NLRA, it is an unfair labor practice for an employer “to interfere with, restrain, or coerce employees” in the exercise of protected rights. Specifically, the Court explained that a workplace rule forbidding “the discussion of confidential wage information between employees … patently violate[s] section 8(a)(1).”

Turning to the employer’s specific confidentiality policy, the Fifth Circuit held that the confidentiality policy’s reference to “personnel information” and “financial information, including costs”—without an exclusion for employee wages—led employees to reasonably believe that it maintained a workplace rule barring them from discussing their wages. This policy, according to the Fifth Circuit, facially violated the NLRA and was an unfair labor practice. See Flex Frac Logistics, L.L.C. v. NLRB, No. 12-60752 (5th Cir. Mar. 24, 2014).

The Take Away

The Fifth Circuit did not consider what the dissenting NLRB member described as the “obvious legitimate business justification” for this confidentiality policy. The Fifth Circuit seemed to ignore the employer’s competitive interest in keeping this information from a competitor and instructed the employer to consider “redrafting its policy to maintain confidentiality for employee-specific information like social security numbers, medical records, background criminal checks, drug tests, and other similar information.” By limiting your policies to this type of information, you will reduce the risk of a similar result. Additionally, you may also consider expressly stating that the policy is not intended to and does not prohibit employees from engaging in protected activity or discussing their individual personnel information as permitted by applicable law. Employers should consider reviewing their confidentiality policies with their labor attorneys to make sure that they strike the proper balance between protecting trade secrets and confidential business information and avoiding potential NLRA violations. There is no better time than now, in light of this ruling, to consider scrubbing confidentiality policies of language that could be interpreted as forbidding protected discussions about employees’ wages.

Louisiana Legislature Passes Employee “Password Protection Law”

By Jones Walker LLP on July 2, 2014 Posted in Confidential Information, Employee Monitoring, Trade Secret

Perhaps the most significant of the employment law bills passed by the Louisiana Legislature this year is the “Personal Online Account Privacy Protection Act” signed into by Governor Jindal on May 23, 2014. Louisiana is now the 17^th state to enact a “password protection law” aimed at protecting an employee’s personal online content included in personal email and other social media accounts. The new law, which becomes effective on August 1, 2014, prohibits Louisiana employers from requesting information to access certain online content such as an employee’s personal email or social media accounts. As social media, email, mobile devices, and cloud-based storage systems become more integrated into everyday business operations, Louisiana employers need to be aware of the details of, and their obligations under, the new law.

The Basics of Louisiana’s Password Protection Law

At its core, the new law prohibits Louisiana employers from discharging, refusing to hire, or otherwise penalizing an individual for failing to disclose credentials to his/her personal email or social media accounts. Specifically, Louisiana employers may not request usernames, passwords, or other means of authentication that allow access to an employee’s or applicant’s “personal online account(s).” Under the statute, a “personal online account” is defined as an account used by an employee exclusively for personal communications unrelated to any business purpose of the employer. The definition of “personal online accounts” appears broad as it likely includes e-mail, instant messaging, social media and other media-sharing accounts. However, the new law also includes a unique and significant limitation that actually makes it one of the narrowest of its kind compared to similar laws passed in other states. It expressly provides that, to be protected under the law, a “personal online account” must be exclusively for personal use. Thus, Louisiana’s password protection law does not apply to accounts created, serviced, maintained, used or accessed for any business purposes of the employer or to engage in any business-related communications even if also used by employees for personal purposes.

Possible Protections for Louisiana Employers

Louisiana’s password protection law includes various exceptions that employers should note. Many of those exceptions are intended to protect legitimate business interests and offer clarification to Louisiana employers regarding the scope and applicability of the new law.

First, as indicated above, the law does not cover accounts that are created, serviced, maintained, used or accessed by a an employee for business purposes of the employer or to engage in business related communications. Thus, the law does not prohibit employers from requesting or requiring that employees: a) disclose login information for any system or equipment provided by the employer; or b) reveal content in an account serviced or provided by the employer or those with which employees have access only by virtue of their employment relationship with the employer. In other words, if the account is provided by or intended to benefit the employer, the restrictions of Louisiana’s password protection law likely will not apply.

Employers also should note that the new Louisiana law contains various exceptions for workplace investigations. The statute expressly provides that employers may discipline or discharge employees for transferring confidential or proprietary information to a personal online account. Employers also may conduct investigations into the unauthorized transfer of such information and require employees to cooperate in such investigations without disclosing their usernames and passwords for their personal accounts. Note, however, that such investigations, may arise only after an employer receives specific information regarding an employee’s personal online account activity.

CFAA “Clouds” In The Aloha State

By PJ Kee on June 19, 2014 Posted in CFAA

iStock_000037734720_Medium The federal district court for Hawaii recently held that assessing a “cloud” computing platform qualifies as assessing a “protected computer” under the Computer Fraud and Abuse Act (CFAA). The holding should not come as a shock. For some, the real shock stems from even arguing that “cloud” computing falls beyond CFAA’s purview. As one blog post derided:

Seriously, ‘cloud’ is a marketing term describing a network of connected computers, often running the same program at the same time or working on the same problem at the same time. Basically, the Internet. If the CFAA didn’t reach the ‘cloud,’ it wouldn’t reach much at all.

The district court agreed — completely — but, in the end, still dismissed the CFAA claim. It followed the employee-friendly approach to interpreting CFAA and held that there was no evidence proving the defendants accessed the “cloud” without authorization. A decision that directly contradicts a decision from a Louisiana federal district court less than two months before (see here).

CASE SUMMARY

In Property Rights Law Group, P.C. v. Lynch, a law firm sued its former contract attorney and others for, among other things, stealing the firm’s trade secrets and violating CFAA by accessing the firm’s cloud computing platform to obtain information without authorization. The defendants argued that summary judgment should be granted on the CFAA claim because the firm’s “cloud” computing platform did not fall within CFAA’s definition of a “protected computer” and, thus, there could be no violation for accessing the “cloud.”

The court disagreed. It seemingly assumed that a “cloud” computing platform qualifies as a “computer” and went directly to whether it also qualifies as a “protected computer.” CFAA protects computers “used in or affecting interstate or foreign commerce or communication,” and relying on previous case law, the district court found that the “cloud” computing platform was connected to the internet, which is sufficient for a computer to be “used in interstate or foreign commerce.” It thus concluded that accessing the “cloud” qualifies as accessing a “protected computer” under CFAA.

But that didn’t end the analysis. The next question was whether the access was without authorization, and the district court ultimately dismissed the claim, finding that the “cloud” access was indeed authorized. Continue Reading

Micah Fincher Discusses the Oculus VR Trade Secrets Lawsuit with LXBN TV

By PJ Kee, Joseph Lavigne and Thomas Hubert on June 16, 2014 Posted in IP, NDAs, Trade Secret

Following up on his recent post, Micah sat down with Colin O’Keefe of LXBN to discuss Facebook’s potential purchase of a massive trade secret suit. In the brief interview, Micah explains the suit’s background and its potential impact on Facebook. Check out what Micah has to say.

Tips For Protecting Against Unfair Competition From Within

By Joseph Lavigne on June 11, 2014 Posted in Confidential Information, Non-Compete, Trade Secret, Unfair Competition

This is Part One in a three-part series on preventing unfair competition and trade secret theft by former employees.

It’s an all too familiar story.

A company spends substantial time and money training employees to run and manage a specific business division. The employees receive access to the company’s confidential information—customer contacts, pricing information, marketing plans and strategy, etc.—as well as tools for performing job functions—expense accounts, computers, cellphones, and tablets. But the employees steadily become dissatisfied with their compensation, senior management, or any other host of issues and decide, “We have the relationships; this is our business; we should go out on our own.” From there, the employees form a competing entity, secure financing, convert customers, and hire away employees/talent. Before you know it, a substantial part of the company’s revenues are at risk—and possibly the company’s most valuable trade secrets.

No company wants to face this scenario—competing against former employees who had access to trade secrets and constant contact with the company’s customers. But it’s not enough simply to hope it won’t happen. Companies must prepare, in advance, to prevent unfair competition and employee theft. These same actions will also be necessary to give companies the necessary ammunition in litigation if employees have successfully misappropriated company information to compete unfairly (employee defection/litigation tips will be addressed later in this series).

This initial post will offer five tips to help companies guard against unfair competition and trade secret theft from within. Continue Reading

European Union Close To Adopting Trade Secret Directive

By PJ Kee on June 4, 2014 Posted in European Union, Trade Secret

The U.S. Senate is not alone when considering whether to federalize trade secret law, as the European Parliament and Council will soon discuss proposed legislation aimed at normalizing trade secret law for EU member states. The European Commission proposed a draft directive to both the Parliament and the Council in November 2013, and now the European Council has issued its opinion.

The Council agreed with the draft directive’s general framework for adopting an EU-wide trade secrets directive (though revised), with the president-in-office of the Competitiveness Council lauding the opinion:

Today, we have decided on a single, clear and coherent legal regime protecting against misappropriation of trade secrets in EU Member States. This decision will promote innovative companies, ensure fair and honest competition and create a secure environment conducting to innovation, the exchange of valuable know-how and cross-border commercial activities within the internal market. This will empower companies to continue investing with more confidence in research and innovation in Europe.

The general framework has five main features, including an employee-friendly component that is somewhat foreign to US legislation:

Minimum harmonization of the different civil law regimes within the member states—but a recognition that individual member states can pass stricter trade secret laws;
Agreement on common principles, definitions, safeguards, procedures, and remedies in civil litigation, but not criminal proceedings;
Six-year statute of limitation period for trade secret theft cases;
Guidelines for preserving confidentiality in trade secret litigation within member states; and
Damage limitation for employees who did not intentionally misappropriate their employers’ trade secrets.

The Parliament has not yet released its opinion on the draft directive, but the Council hopes the two can agree on a final directive during the first reading. We will continue to monitor the legislative process and will provide an analysis of the Parliament’s opinion once it’s released.

Did Facebook Buy A $2 Billion Trade Secret Lawsuit?

By Jones Walker LLP on June 2, 2014 Posted in IP, NDAs, Trade Secret

VR -- Oculus A couple weeks ago, a company sued a competitor for allegedly stealing its trade secrets and hiring a key former employee, who developed the trade secret technology. But this is no run-of-the-mill trade secrets case. It involves some of the most pioneering figures within the gaming industry.

ZeniMax Media, Inc., owner of id Software, LLC, publisher and maker of popular video games that included The Elder Scrolls series and DOOM, sued Palmer Luckey and a company he founded, Oculus VR, Inc. A maker of virtual reality headsets, Oculus made other news recently after being acquired—for $2 billion—by Facebook, Inc. Now ZeniMax wants its share of Oculus’s payday.

ZeniMax claims that Luckey’s earliest virtual reality prototype, the Rift, was not a “viable” consumer product. Though worn on a user’s head with a display covering both eyes, the Rift allegedly lacked the hardware sensors and advanced software to seamlessly track the users head and neck movements without producing a lagging, disorienting image. It wasn’t a “viable” product until Luckey sent the Rift to John Carmack, co-founder of id Software and then a ZeniMax employee. Carmack made numerous modifications and improvements—creating what ZeniMax calls its trade secrets and know-how. ZeniMax alleges that Luckey and Oculus then stole this trade secret information, used it without permission, and even lured Carmack to leave ZeniMax and join Oculus as its Chief Technology Officer. Then Facebook agreed to buy Oculus for $2 billion in cash and stocks.

Perhaps the most important evidence buttressing ZeniMax’s trade secret claims is a non-disclosure agreement. Luckey agreed not to use ZeniMax’s confidential information without its permission. This agreement allows ZeniMax not only to argue that it took reasonable measures for maintaining the confidentiality of its trade secrets, but also to bring a separate breach of contract claim. While Oculus itself apparently did not expressly agree to the non-disclosure agreement, Luckey, probably the principal beneficiary of Facebook’s buyout, may be personally liable if a jury finds he stole ZeniMax’s trade secrets or broke his promises under the agreement.

We’ll follow up with more when Luckey and Oculus file their answers. But the takeaway from ZeniMax’s complaint is that companies should require third parties to sign confidentiality agreements before sharing confidential and proprietary information. These agreements prohibit using the shared information without company permission—and allow for damages, or even injunctive relief, for contractual breaches. In the long run, this simple precaution can lead to big payoffs.

Comfortable With Your Non-Compete?

By Thomas Hubert on May 30, 2014 Posted in Non-Compete

A recent decision from a Pennsylvania appellate court should prompt employers to review their existing non-compete agreements. They may be unenforceable if applicable state laws have changed.

In Socko v. Mid-Atlantic Systems of CPA, Inc., a Pennsylvania appellate court considered a common non-compete concern, but it was the first time that a Pennsylvania appellate court addressed it in the context of a written agreement. The question was this: Does “continued employment” provide sufficient consideration for a written non-compete agreement entered after the employment relationship begins and that contains a clause that the parties “intend to be bound” by the covenants?

The court answered no, holding that “continued employment” and the written intention were simply not enough. The decision aligns Pennsylvania with several states that have reached the same conclusion, while rejecting the trend of other states, like Texas, that have gone the opposite direction.

In the case, the employer and an at-will employee’s agreement stated that the parties “intend to be legally bound” by the non-compete—but that was it. There was no mention that the employee received any other benefit (except continuing to be employed) or a change in his job status when signing the agreement. This omission was fatal—and the non-compete could not be enforced. While this case could be headed to the Pennsylvania Supreme Court, employers doing business through Pennsylvania employees will need to rework their non-compete agreements to make sure they’re supported by sufficient consideration, at least for now.

Of course, in the meantime, it’s always good practice to know the laws of the state that could potentially govern your restrictive covenants. Non-compete laws vary from state to state, including rules for interpreting choice-of-law and forum-selection clauses. Unwary employers may think they have a solid non-compete—when, in fact, they don’t. For instance, a non-Louisiana company may have non-competes with its Louisiana employees that contain choice-of-law provisions calling for a state law other than Louisiana. The choice-of-law provision will only be enforceable in Louisiana if the employee ratifies it after a dispute arises (when very little loyalty remains). A non-compete drafted to comply only with another state’s law will almost certainly not comply with Louisiana’s strict requirements—and like the non-compete in Socko—may be unenforceable.

Employers need to be proactive and consistently ensure that their non-competes have the greatest chance of being enforceable. A yearly audit would do the trick—keeping your non-competes up to date for the best possible results when they are needed the most.

Regulatory Round-Up on Cybersecurity

By Jones Walker LLP on May 29, 2014 Posted in Cybersecurity, Data Protection

FFIEC

Financial regulators continue to sound the alarm about cybersecurity. The Federal Financial Institutions Examination Council (“FFIEC”) conducted a cybersecurity webinar on May 7, 2014, targeted at senior management of community banks. The FFIEC noted that attacks on smaller institutions are escalating in number and sophistication. The presenters noted that too many banks regard cybersecurity as the sole responsibility of either their IT team or a third party vendor. While community banks recognize the fraud threat of account takeover and wire fraud, the FFIEC says few recognize the end of life of a third party software product is a critical threat as well. As a software tool reaches the end of its life, internal and external oversight diminishes. The resulting decline in care is targeted by fraudsters who are well aware of the trend and ramp up efforts to exploit weaknesses which the software vendor has little incentive to identify and correct. The risk is enhanced by the strong consolidation in the industry, leaving just a handful of commonly used platforms.

In a speech delivered on May 16, 2014, the Comptroller of the Currency, Thomas Curry, also sounded the alarm about consolidation in the world of third party service providers. He also expressed concern about banks’ increasing reliance on foreign vendors or foreign-based subcontractors of U.S. vendors. Curry reminded the audience that bank regulators have long-standing guidance on both vendor selection and country risk.

On March 26, 2014, the SEC convened a roundtable on cybersecurity. In a discussion about risks to broker-dealers and investment advisers, roundtable participants sounded common themes. First, the hijacking of consumer e-mail accounts is rampant but asset managers continue to interact in e-mail because of customer preference for ease in communications. They also identified a significant data breach as being able to “bring down an IA.” Notwithstanding this, they acknowledged that most investment advisors are small businesses and that it is unrealistic to expect them to have an incident response infrastructure. Instead, participants recommend that firms focus on where sensitive data is housed and all the ways in which it can be accessed. With limited resources, firms should be focused on protecting the most important information 110 percent rather than spreading resources firm-wide for only 75 percent protection. The panelists agreed that protection against cybercrime has to be holistic and cannot be relegated to IT.

Katharine Musso is a partner in Jones Walker’s Banking & Financial Services Practice Group and is head of the firm’s Birmingham office. She has over 25 years of experience representing banks and financial institutions before state and federal regulators, and regularly advises clients on compliance issues relating to risk management. She is a Certified Fraud Examiner and a Certified Anti-Money Laundering Specialist.