October 2023: Public information can be a trade secret; Litigants get creative to contest non-competes; NJ addresses the enforceability of non-disparagements; Law firm DEI programs face legal challenges
Compilation of public information can be a trade secret
The U.S. Court of Appeals for the First Circuit recently affirmed a district court holding that spreadsheets compiling customer information were trade secrets—even where the data they contained was publicly available. The plaintiff, an insurance company, sued two of its former salespersons. One claim was for misappropriating spreadsheets containing information about thousands of customers, including names, addresses, phone numbers, email addresses, renewal dates, types of insurance policies, and premiums paid.
The employees argued that the spreadsheets were not trade secrets because their data was derived from publicly available sources. The court held that even to the extent that were true, recreating the compilation would have been “immensely difficult” and the spreadsheets were therefore entitled to trade secret protection. Importantly, the court also held that the spreadsheets had independent economic value and that the employer took sufficient steps to protect them. The court also looked to language in the employees’ agreements, where the employees acknowledged that misuse of confidential information would cause “irreparable damages,” and which “communicated clearly which information was confidential and how it was to be handled.” The employees were held liable for breach of contract, misappropriation of trade secrets, and violating the federal Defend Trade Secrets Act for retaining and utilizing the spreadsheets.
S&K take: The treatment of customer data compilations as a trade secret is a common issue, especially when client-facing employees depart. This case involving customer data is a reminder that even publicly available data can be a trade secret. Employers also need to ensure that they do more than pay lip service to the confidential nature of their data. To claim trade secrets protection, employers must be able to show that they take measures to protect confidentiality.
Massachusetts employee allegedly “moves” to California to avoid non-compete
A Massachusetts software company is suing a former executive to prevent him from joining a California-based competitor in violation of his non-compete. The employer asserts that the executive signed an apartment lease in California and then declined to honor his noncompete as unenforceable in that state. The employer also asserts that the executive had not sold his Massachusetts home and that the executive’s wife and children would not be “joining him in California.” The lawsuit is brought in Massachusetts under Massachusetts—not California—law.
S&K Take: The plaintiff employer appears poised to argue that the executive’s attempt to evade his non-compete by renting an apartment in California should be rejected, and that Massachusetts law should apply. If litigated to a judgment, this case could have implications on the reach of California law and public policy, where non-competes and other post-termination restrictive covenants are unlawful. If the facts alleged are true and California law nonetheless applies, this case could establish a roadmap for future challenges to restrictive covenants. We will be monitoring.
Connecticut portfolio manager sues to invalidate two-year global non-compete
A former portfolio manager is suing his former employer in Connecticut Superior Court to invalidate a global non-compete that would, if enforced, bar him from working in any capacity as a securities or commodities trader in “virtually all of the major financial centers of the world” for two years after his termination. The former employee claims that the non-compete is extraordinary and unreasonable, particularly since his contractual non-disclosure and non-solicitation obligations “adequately protect” the former employer’s legitimate business interests.
S&K Take: These cases are highly fact-dependent, but a court decision here (if there is one) could bear on the enforceability of non-competes for portfolio manager employees. We will monitor.
NLRB tries to dismantle employee non-competes and non-solicits
The General Counsel for the National Labor Relations Board (“NLRB”) previously publicized her position that noncompete clauses for non-managerial and non-supervisory employees may violate the National Labor Relations Act (“NLRA”) by chilling employee rights. The NLRB itself is now poised to decide whether and to what extent to adopt the General Counsel’s position, having issued a complaint alleging that Harper Holdings, LLC violated the NLRA by maintaining and enforcing non-compete, non-solicit, and non-disparagement provisions in its offer letters, employee handbook policies, and standalone agreements.
S&K Take: The General Counsel’s position has not yet been adopted by the NLRB, but may be soon. While any NLRB decision will be subject to judicial review, this complaint is consistent with the NLRB’s aggressive expansion of employee rights under the NLRA and further underscores the importance of drafting restrictive covenants as narrowly as possible as they come under increased scrutiny.
NJ Supreme Court to decide enforceability of non-disparagement provisions in settlement agreements
The New Jersey Supreme Court will address the enforceability of a non-disparagement clause in a settlement agreement that resolved a former employee’s sex discrimination claim against her former employer. The employer sued the employee for her statements in a televised news interview that was allegedly disparaging. The case centers on a 2019 state statute that bars any contract provision that “has the purpose or effect of concealing the details relating to a claim of discrimination, retaliation, or harassment.” At issue is whether this statute—which targets non-disclosure provisions—also applies to non-disparagement provisions. Notably, New Jersey recently introduced legislation that, if passed, would make clear that the 2019 law applies not just to non-disclosures, but non-disparagements as well.
S&K Take: Non-disclosure and non-disparagement provisions are familiar terms in employment, separation and settlement agreements. However, both clauses have been under attack by state and federal legislatures and agencies, including the Securities and Exchange Commission and the NLRB. Employers who utilize these clauses need to draft them carefully to maximize coverage while mitigating the risk that they will be deemed unenforceable or, worse, result in liability for the employer.
Law firm DEI programs face legal threats
Entities in several industries are facing new challenges to diversity, equity and inclusion programs following the U.S. Supreme Court’s rulings in Students for Fair Admissions v. Harvard and Students for Fair Admissions v. University of North Carolina, which struck down race-based admission practices at such institutions. In recent months, the same lawyer for the plaintiffs in Students for Fair Admissions, now on behalf of an organization called Alliance for Equal Rights (“AER”) has threatened and/or filed lawsuits against at least five law firms challenging their diversity fellowship programs for underrepresented law students as “racially discriminating against future lawyers.” AER recently withdrew their two lawsuits after the defendant firms voluntarily eliminated their requirements that applicants come from historically underrepresented groups in the legal industry. AER has threatened at least three other firms with demand letters.
S&K Take: The Supreme Court’s Students for Fair Admissions decisions did not bear directly on private employers. However, opponents of affirmative action are seeking to apply the Court’s reasoning to private sector employers to challenge diversity, equity and inclusion (“DEI”) initiatives and other employment decisions. Employers should monitor these developments carefully and consider whether and to what extent to adjust DEI goals and programs.
*****
If you have any questions, please contact Anne C. Patin at (212) 574-1516 or patin@sewkis.com or David Baron at (212) 574-1551 or baron@sewkis.com.
