Huawei’s Two Bites At The Apple To Dismiss T-Mobile’s Trade Secret Claims

In a previous post, we examined T-Mobile’s complaint against Chinese smartphone marker Huawei and its US subsidiary, in which T-Mobile accused Huawei employees of stealing trade secrets relating to a mobile phone testing robot named “Tappy”.

T-Mobile filed its complaint in September 2014, and the following month Huawei’s US subsidiary responded with a motion to dismiss. Huawei USA argued the complaint failed to identify any information that qualified as a trade secret, urging the Court to consider three published patent applications and a video featuring Tappy (see below). Huawei also challenged T-Mobile’s claim that it created the robot, pointing out the conspicuous Epson logo on one of Tappy’s components.

T-Mobile’s opposition disputed Huawei’s version of the facts and argued that it was improper to consider papers outside of the complaint at the motion to dismiss stage. It also accused Huawei of failing to distinguish between its burden of, on the one hand, identifying its trade secrets, a pleading requirement, and, on the other hand, proving that the information was in fact secret, a question of fact requiring discovery. T-Mobile further stressed that Epson only created one component of its robot and, even when combining known components, trade secret protection may extend to the combination itself, if secret.

By November 2014 briefing on Huawei USA’s motion to dismiss was complete. For five months no substantive motions were filed, and the Court had not yet ruled on Huawei USA’s motion.

Then, last week, on April 22, 2015, the Chinese Huawei parent company filed its own motion to dismiss. It asserted a new argument—lack of personal jurisdiction—but it also adopted and expanded on its subsidiary’s arguments on the merits. It attached to its motion foreign patent applications corresponding to the ones its subsidiary previously identified and several media reports on various aspects of T-Mobile’s robot and testing lab, some of which were not included in the earlier motion to dismiss.

Considering that the same counsel represents both Huawei’s parent and subsidiary companies, it appears Huawei may get a second chance to brief its earlier motion to dismiss before the Court issues its ruling. T-Mobile may cry foul, but it is more likely to attack Huawei’s new evidence and arguments on the same grounds as its previous opposition.

We’ll have more when the Court issues its ruling. Stay posted.

Federal Court Invalidates Tennessee Choice-of-Law Clause in Louisiana Employee’s Non-Compete

logoThe federal district for the Western District of Louisiana added to the growing list of decisions that have applied Louisiana’s non-compete statute to invalidate  choice-of-law or forum-selection clauses. These decisions have struck down clauses that, on their faces, would have required Louisiana employees of non-Louisiana employers to litigate under the law or in the courts of some other state. The decisions should also serve as a reminder that employers should not take a one-size-fits-all approach when drafting non-competes for employees residing in multiple states.

The Ruling. Louisiana’s non-compete statute, La. R.S. 23:921, invalidates a choice-of-law or a forum-selection clause in an employment agreement unless the employee agrees to the clause or expressly ratifies it after the dispute arises. After leaving their employment, employees generally do not ratify these clauses made at the start of the employment relationship  — unless of course the chosen law or forum favors the employee. This scenario played out in Bell v. L. H. Brown Company, Inc., No. 14-2772 (W.D. La. 2015), where a Louisiana employee was able to avoid complying with his non-compete.

Charles Bell was a recently-departed employee who sued his former employer in Louisiana state court, asking for a declaration that the non-compete agreement was invalid under Louisiana law. After his former employer removed the case to federal court, Mr. Bell raised these same arguments. The pivotal question for the court to decide was whether Louisiana law or Tennessee law applied — since the non-compete agreement included a Tennessee choice-of-law clause.

The facts did not present an uncommon scenario: the employer was located in one state while Mr. Bell resided in another. The employer’s principal place of business was in Memphis, Tennessee, and Mr. Bell signed  the non-compete agreement, knowing that it called for Tennessee law to govern his relationship with the company. The Tennessee employer argued that the non-compete complied with Tennessee law and emphasized that the parties formed the employment relationship in Memphis when Mr. Bell personally delivered the agreement with his signature to the company’s Memphis headquarters (where the employer then signed it); Mr. Bell had been the only company employee in Louisiana; Mr. Bell received his company vehicle, telephone, and computer from the Memphis office; and Mr. Bell attended work-related meetings in Tennessee.

Notwithstanding the many contacts with Tennessee, the court refused to enforce the parties’ choice of Tennessee law. As a court sitting in Louisiana, the federal judge applied Louisiana’s choice-of-law rules. The court found that Louisiana’s public policy that Louisiana law and Louisiana courts must determine the validity of non-competes entered into by Louisiana employees was so strong that the policy outweighed the other considerations in the choice-of-law analysis.

The court in Bell v. L. H. Brown went on to invalidate the non-compete agreement. Louisiana law requires that non-compete agreements limit their geographical scope to “a specified parish or parishes [i.e., county or counties], or municipality or municipalities, or parts thereof.” The non-compete agreement did not contain the requisite geographic restriction which, according to the employer, Tennessee law would not have imposed.

The TakeAways.  Employers must be aware of each potential state law that could affect their non-competes with employees working or living in multiple states.  This case shows that a Louisiana court will usually apply Louisiana’s non-compete laws to Louisiana employees — even if the non-compete calls for another state’s law and even if the non-compete (drafted to comply with the law that the parties selected in their agreement) would be invalid under Louisiana law. This case also teaches that employers should consider quickly filing suit in their preferred forum if they question whether their non-compete complies with the employee’s home-state laws. Conversely, an employee who expects his or her former employer to try to enforce  a non-compete agreement should consider prompt legal action as well in his or her own state.

Update: Comfortable With Your Non-Compete?

PennsylvaniaWe previously analyzed a Pennsylvania appellate court decision, which held that a non-compete agreement was unenforceable for lack of consideration. The case, Socko v. Mid-Atlantic Systems of CPA, Inc., is now before the Pennsylvania Supreme Court.

The Court must decide whether Pennsylvania law allows parties to waive the consideration requirement for non-competes through an express agreement.

On the one hand, Pennsylvania’s Uniform Written Obligations Act (“UWOA”) permits parties to a written agreement to waive their rights to challenge the validity of the contract based on lack of consideration.  On the other hand, valuable consideration is necessary for a valid non-compete.

Both parties concede that valuable consideration was not exchanged for the non-compete at issue. But the non-compete explicitly states that the parties “intend to be legally bound” by the restrictive covenants.

The employer argues that the UWOA’s waiver provision should apply to non-competes.  And because the agreement incorporates the waiver language — “intend to be legally bound” — the non-compete is enforceable despite the lack of valuable consideration. Conversely, the employee urges the Court to affirm the appellate court’s holding — that is, the consideration requirement for non-competes cannot be waived.

We will continue to monitor this case, and will post an update as soon as the Pennsylvania Supreme Court issues its ruling. But regardless of the Court’s decision, this case still serves as a reminder: employers need to be proactive and consistently ensure that their non-competes have the greatest chance of being enforceable.

“Professional” Distinction: A New Approach To Bans On Non-Competes?

A recent Florida appellate court decision may alter 200px-Florida-StateSeal.svglong-standing prohibitions against non-compete agreements for certain professionals. In AmSurg New Port Richey FL Inc. v. Vangara, the court upheld a non-compete, finding that it prohibited a physician from operating a rival business—but not from practicing medicine. This was the pivotal distinction for saving the non-compete, and other state courts could adopt this same logic.

Background:   In 2007, Dr. Vangara and his business partners entered into a joint venture agreement with AmSurg New Port Richey FL, Inc. (AmSurg), to form the New Port Richey FL Multi–Specialty ASC, LLC (Multi–Specialty ASC)—an ambulatory surgical center. The joint-venture agreement was governed by Tennessee law and included a non-compete. By its terms, the restrictive covenants prohibited Dr. Vangara from having “any financial interest in any business or entity competing or planning to compete with the [Multi-Specialty ASC].”

But Dr. Vangara failed to comply with this covenant. In 2010, AmSurg learned that Dr. Vangara owned and operated a competing ambulatory surgery business, and after multiple cease-and-desist requests, Dr. Vangara refused to stop. AmSurg finally responded by suing Dr. Vangara for breach of contract and various other business torts.

Rationale:   At the trial court level, Dr. Vangara filed a summary judgment motion, arguing that the non-compete was invalid as a matter of law. The trial court agreed. It found that the non-compete was inimical to Tennessee’s public policy, and therefore unenforceable. The trial court relied on a Tennessee Supreme Court decision that prohibited most contracts that restrict a doctor’s right to freely practice medicine.

In that case, a medical clinic sued to enforce a non-compete that prevented a physician from practicing medicine within a twenty-five mile radius. Finding that the non-compete  was unenforceable as a matter of public policy, the Tennessee Supreme Court placed more value on public interest considerations—such as affordable healthcare and a patient’s fundamental right to freely choose physicians—rather than the specific terms of the contract. These same concerns guided the trial court’s refusal to enforce Dr. Vangara’s non-compete.

On appeal, the court took a narrower interpretation of the Tennessee Supreme Court decision.  It distinguished between “practicing medicine” and “operating a competing business.” The court reasoned that the joint-venture agreement only prevented Dr. Vangara from having ownership interests in competing businesses—not from practicing medicine. The court pointed out that the non-compete specifically provided that Dr. Vangara was “not prevent[ed] from engaging in his … profession, the practice of medicine.” Because Dr. Vangara could freely practice medicine without violating the joint-venture agreement, the court reversed the summary judgment previously entered in Dr. Vangara’s favor.

Take Away:   In states that prohibit non-competes for certain professions based on public policy concerns, this court’s distinction—between “practicing” a profession and “owning” a competing business within that profession—could limit the scope of those non-compete bans. Companies should thus consider making similar distinctions when drafting non-competes for traditionally-protected professionals.

Federal Arbitration Act Preempts Louisiana’s Non-Compete Statute

Eastern_district_Lousiana_seal_v1_AG_126px_0

The U.S. District Court for the Eastern District of Louisiana recently held that the Federal Arbitration Act preempts Louisiana’s non-compete statute (La. R.S. 23:921). Among other things, this statute invalidates forum selection clauses in employment agreements unless the employee agrees to or expressly ratifies the clause after the incident that gives rise to the dispute. Though the statute expresses a strong public policy of Louisiana, the Eastern District found that federal courts must enforce otherwise valid arbitration clauses that select a particular forum—even if the clauses violate Louisiana’s non-compete statute.

Background.   In Sherman v. RK Restaurant Holdings, Inc., No. 13-6054 (E.D. La. 2014), a former employee sued his former employer in state court in New Orleans, where the employee had worked at the employer’s restaurant. The employer removed the case to the Eastern District, and then moved to stay the lawsuit pending arbitration. The employer claimed that an arbitration clause in the employment agreement required that the parties arbitrate their dispute in either Lufkin or Nacogdoches, Texas.

In response, the employee argued that Lufkin and Nacogdoches, Texas, were each more than 350 miles away from his home in New Orleans and that enforcing the arbitration clause would be unconscionable. The employee also argued that the clause was invalid under La. R.S. 23:921 because he had not agreed to or ratified the forum selection clause after the dispute arose. The employee pointed out that the United States Supreme Court had said in M/S Bremen v. Zapata Off–Shore Company, 407 U.S. 1 (1972) that contractual forum selection clauses “should be held unenforceable if enforcement would contravene a strong public policy of the forum in which the suit is brought.” According to the employee, Louisiana has such a policy, expressed in La. R.S. 23:921.

Rationale.  The Eastern District ultimately found that the Federal Arbitration Act preempted La. R.S. 23:921 and required the court to enforce the arbitration agreement as written.

The court agreed that the arbitration clause “contains a forum selection clause that violates La. R.S. 23:921” because it calls for a Texas forum. But the Federal Arbitration Act says that an arbitration clause in a contract involving interstate commerce “shall be valid, irrevocable, and enforceable, save upon such grounds exist at law or in equity for the revocation of any contract.” Thus, the court noted, “as a matter of federal law, arbitration agreements and clauses are to be enforced unless they are invalid under principles of state law that govern all contracts.”

From there, the court concluded that the arbitration clause would be valid under general contract law principles in Louisiana. Consequently, the FAA required the court to enforce the arbitration clause, notwithstanding its conflict with La. R.S. 23:921.

The TakeAway. Louisiana has a strong public policy that limits the enforceability of forum selection clauses in employment agreements. An employer who expects to be able to use a non-Louisiana forum to enforce a non-compete agreement or another employment-related agreement with a Louisiana employee may find its efforts blocked by La. R.S. 23:921. However, an otherwise valid arbitration clause covered by the FAA may be enforceable, even if it would violate the restrictions in La. R.S. 23:921 on forum selection clauses.

Forum Selection Clause Causes Roadblock In Trade Secret Case

StopSignThe recent decision in Wellogix, Inc. v. SAP America, Inc., No. 14-0741 (S.D. Tex. Nov. 10, 2014), demonstrates that federal courts can rely on contractual forum selection clauses to dismiss or transfer trade secret theft cases. It’s a reminder to weigh how these clauses could impact litigation strategies and to consider the specific language negotiated during contract talks.

Background:  Wellogix and SAP AG/SAP America, Inc. (SAP) entered into a cooperative relationship to develop software for oil and gas operators. That relationship soured shortly after a client pitch. Wellogix, who had shared its trade secret technology with SAP through a cooperation agreement, believed that SAP misappropriated those trade secrets to develop software solutions for a client—without notifying Wellogix and excluding Wellogix from the deal.

In 2008, Wellogix sued SAP (and the companies who benefited from SAP’s alleged misconduct) for breach of contract, trade secret theft, and various other business torts. But Wellogix’s claims against SAP were dismissed because the cooperation agreement contained a forum selection clause that called for a German forum. Wellogix could not have been too upset, though, since its trade secret claim against a co-defendant resulted in a multi-million-dollar jury verdict.

A dispute between SAP and Wellogix nevertheless reemerged in 2010. SAP sued Wellogix, seeking a judgment concerning Wellogix’s patents. Wellogix responded by filing counterclaims—reasserting its trade secret theft claims previously dismissed in 2008. SAP opposed the counterclaims and sought to dismiss them based on the forum selection clause relied on in the 2008 litigation.

Rationale:  The court first considered whether SAP waived its right to enforce the forum selection clause by bringing the patent action. After examining choice-of-law questions and various approaches to waiver, the court reasoned that SAP had not waived its right to enforce the clause, even though it had sued Wellogix in the Texas court.

The court then moved to the ultimate question—whether the forum selection clause applied to Wellogix’s trade secret claims. The court focused on the clause’s language and found that, under federal law, it must be construed broadly to encompass both contract claims and trade secret claims. Rather than using narrow language—like disputes “arising out of” the contract—the cooperation agreement used the phrase— disputes “arising in connection with” the contract. The court noted that this phrase reaches “every dispute between the parties having a significant relationship to the contract and all disputes having their origin or genesis in the contract.” Because the trade secrets were shared through the cooperation agreement, the court reasoned that Wellogix’s claims had a significant relationship to and stemmed from the cooperation agreement. And thus, the forum selection clause applied to Wellogix’s trade secret claims.

But that did not end the court’s analysis.  Since the clause called for a non-federal forum, the court could not simply “transfer” the case. That is, the court could only dismiss it. And in Atlantic Marine Construction Co., Inc., the Supreme Court recently instructed lower courts confronted with this scenario to undertake a traditional forum non conveniens analysis to decide whether dismissal is appropriate. That’s what the court did and ultimately dismissed the case—with the caveat that it “may reassert jurisdiction upon timely notification if the courts of Germany refuse to accept jurisdiction.”

Take Away:  The decision reminds us that forum selection clauses can significantly impact trade secret litigation and strategy. It also underscores the need to seriously consider a forum selection clause’s language during contract negotiations—focusing specifically on how narrowly or broadly a court will interpret phrases like “disputes arising out of” as opposed to “disputes arising in connection with.”

Chinese Company Steals T-Mobile’s “Tappy” Robot Tech, Complaint Alleges

TappyKey takeaway: Where appropriate, confidentiality agreements should include promises not to reverse engineer the disclosing party’s technology.

Meet “Tappy”, the mobile phone testing robot. Designed by T-Mobile’s Bellevue, Washington, labs in 2006, its mechanical “finger” mimics user inputs for mobile phones. Tappy helps T-Mobile model how users interact with mobile phones, replicating days or weeks of use in a few hours of testing. T-Mobile claims that testing mobile phones before they’re released helps improve their quality, decreasing the number of returns and unhappy T-Mobile customers.

T-Mobile keeps Tappy in a secure testing lab at its offices in Bellevue, Washington. Based on contractual relationships between T-Mobile and Chinese smart phone maker Huawei—requiring Huawei to maintain the secrecy of T-Mobile’s intellectual property and to refrain from attempting to reverse engineer or photograph Tappy—some of Huawei employees had security clearance to access T-Mobile’s labs.

T-Mobile now accuses Huawei of stealing its trade secrets in Tappy’s design and software, according to a complaint T-Mobile filed with a Federal Court in Seattle in early September. Huawei’s allegedly unsuccessful efforts to create its own mobile phone testing robot led it to steal T-Mobile’s robot technology.

T-Mobile alleges that Huawei’s employees engaged in serious misconduct. For instance, T-Mobile claims that two Huawei employees, who had access to the lab, allowed a member of Huawei’s Test Systems R&D team in China to enter the lab, even though he had no permission from T-Mobile to do so. After T-Mobile asked this R&D team member to leave, the two Huawei employees then helped him reenter the lab the next day to photograph Tappy—despite T-Mobile’s ban on lab photography. T-Mobile also alleges that another Huawei employee stole an “end effector” (a key component of Tappy), lied about knowing its whereabouts, and used it in a conference call with Huawei’s R&D team, who were intent on learning more about Tappy’s robot finger and tip. T-Mobile also accuses Huawei employees of stealing Tappy’s operating software.

T-Mobile’s primary claims are theft of trade secrets, breach of contract, and unjust enrichment. Interestingly, T-Mobile also claims that several aspects of the robot are patented or patent-pending. If that’s true, then it may not have trade secret protection in information to the extent it’s published in T-Mobile’s patent applications, because that publicly-available information may no longer be considered a “secret.” On the other hand, it would be surprising for Huawei to have gone to such lengths to obtain information about T-Mobile’s robot if the desired information was already published. In any event, if the allegations in the complaint are true, Huawei may be liable for breaking its promise not to reverse engineer T-Mobile’s robot.

This complaint serves as a caution. Companies should ensure that their confidentiality agreements include prohibitions on reverse engineering, if they plan to disclose technology secrets to partners or vendors.

Protecting Trade Secrets Furnished To The Government

Picture this situation:  your company is submitting a bid on a public contract, whether a technology acquisition, software development project, construction project, insurance quote, or financial services contract, to name but a few.  Or picture responding to state and federal regulatory authorities that require disclosing company information concerning approval and licensing of your gaming establishment or approval of your oil and gas exploration project. Then also picture a legal framework that requires governmental agencies, whether state or federal, to disclose public records to all who ask—even competitors.

Essentially, your company has just disclosed proprietary information that is not normally open to the public, and could include sales margins or profits, personnel lists, undisclosed proprietary technology, customer lists and supplier information, to name but a few.  And those governmental agencies could be required to disclose that proprietary information to anyone who requests it.

This is not just a mental exercise.

The last few years have been marked by increases in businesses seeking to obtain information on their competitors by filing public record requests.  Companies have found that seeking such public documentation is a relatively inexpensive and easy way to scout out their competitors, requesting production of all competitor’s documents filed with public entities.

What, if anything, can be done to protect your confidential and proprietary information from disclosure to the public or other entities?  Fortunately, state and federal law typically provide for certain levels of protection for third party trade secrets.  But such protection in some cases requires court involvement and litigation expense in order to achieve such protection. Continue Reading

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

2004lamapA 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?

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.

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