Recent Legislative and Regulatory Developments Regarding Non-Competes

While the enforceability and interpretation of restrictive covenants, and perhaps especially non-competition agreements, remains a major issue in courts across the country, it is important not to overlook the important legislative and regulatory developments that occurred this year.  Here, we summarize six of the most significant such events.  The disparate treatment of restrictive covenants from state to state, and the fact that there is often some question as to which law should apply to a given matter, makes it particularly important to monitor legislative developments in this area.  There is also increasing regulatory interest in the impact of these agreements, including actions by both the DOJ and FTC.

I. The Trade Secrets Clarification Act

On December 28, 2012, the President signed into law the Theft of Trade Secrets Clarification Act, Pub. L. No. 112-236 (2012).  The principal raison d’etre of the statute is to overrule the Second Circuit’s holding in U.S. v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), in which the Court, construing the Economic Espionage Act (18 U.S.C.  1832(a)) held that a computer programmer who copied the source code of a proprietary computer program belonging to his employer onto his home computer for the purposes of creating a similar program did not violate the Economic Espionage Act.  The Court based its holding on the determination that the source code was not related to a product “produced for…interstate or foreign commerce” as required by the Act.  The new statute extends coverage from “products” which are “produced for” interstate or foreign commerce to “products or services” which are “used in or intended for use in” interstate or foreign commerce.

·        Russell Beck, “Theft of Trade Secrets Clarification Act of f2012 is Law”, Fair Competition Law Blog (Jan. 7, 2013) available at: http://faircompetitionlaw.com/2013/01/07/theft-of-trade-secrets-clarification-act-of-2012-is-law/

·        Robert B. Milligan, “President Obama Signs Trade Secrets Clarification Act and House of Representatives Considers Enhancing Economic Espionage Act Penalties”, Trading Secrets (Dec. 31, 2012) available at: http://www.tradesecretslaw.com/2012/12/articles/trade-secrets/president-obama-signs-trade-secrets-clarification-act-and-house-of-representatives-considers-enhancing-economic-espionage-act-penalties/

·        Jessica Mendelson, “United States Senate Unanimously Approves the Theft of Trade Secrets Clarification Act”, Trading Secrets (Dec. 3, 2012) available at: http://www.tradesecretslaw.com/2012/12/articles/trade-secrets/united-states-senate-unanimously-approves-the-theft-of-trade-secrets-clarification-act/

·        Mitchell Boyarsky, “Federal Government Taking More Steps to Protect Trade Secrets”, IP Law Alert (Jan. 23, 2013) available at: http://www.iplawalert.com/2013/01/articles/trade-secret/federal-government-taking-more-steps-to-protect-trade-secrets/

II. New Jersey Adopts Uniform Trade Secrets Act

On January 9, 2012, New Jersey finally adopted a version of the Uniform Trade Secrets Act, leaving only three states, Texas, New York, and Massachusetts, that have not yet adopted some form of the uniform statute.  See Robert B. Milligan, “New Jersey Adopts Variation of Uniform Trade Secrets Act”, Trading Secrets Blog (Feb. 3, 2012) available at: http://www.tradesecretslaw.com/2012/02/articles/trade-secrets/new-jersey-adopts-variation-of-uniform-trade-secrets-act/

III. New Hampshire Statute Requires Employers to Disclose Non-Compete Requirements to Job Applicants

On May 15, 2012, then-New Hampshire Governor John Lynch signed HB 1270 into law which, effective July 14, 2012, requires that employers disclose non-compete and non-piracy agreements to potential employees prior to making offers of new employment.  The law also requires that such policies be disclosed to current employees with any offer of change in job classification.  At the moment, New Hampshire appears to be unique among the states in requiring such disclosures. 

For additional information, see

·        Robert B. Mulligan, Ryan Malloy, “New Hampshire Enacts New Law Requiring Disclosure of Non-Compete and Non-Piracy Agreements Prior to Job Offer and Change in Job Classification”, Trading Secrets (June 20, 2012) available at: http://www.seyfarth.com/publications/OMM062012

·        Diane M. Saunders “New Law in New Hampshire Requires Employers to Disclose Non-Compete Agreements at the Time of Hire or Change of Job”, Ogletree Deakins Blog (Aug. 17, 2012) available at: http://www.ogletreedeakins.com/publications/2012-08-17/new-law-new-hampshire-requires-employers-disclose-non-compete-agreements-tim

IV. Maryland Legislature Considering Making Non-Competes Unenforceable Where former Employee Qualifies for Unemployment Compensation

On January 9, 2013, the Maryland Senate introduced SB 51 which would invalidate the “noncompetition covenants” for ex-employees who obtained unemployment benefits.  If ultimately signed into law, the Act, which would apply only prospectively, would become effective on October 1, 2013.  SB 51 applies only to “noncompetition covenants”, but it is unclear whether that definition would be extended to all restrictive covenants and, if not, how the Courts would differentiate between “noncompetition” covenants and other restrictive covenants. 

For further commentary, see:

·        Scott A. Schaefers, “To Work or Not to Work – Maryland’s Senate Considers Changes to Non-Compete Law for Those on Unemployment”, Trading Secrets (Jan. 17, 2013) available at: http://www.tradesecretslaw.com/2013/01/articles/restrictive-covenants/to-work-or-not-to-work-marylands-senate-considers-changes-to-non-compete-law-for-those-on-unemployment/

·        Randi K. Hyatt, “Proposed Maryland Legislation Would Eliminate Non-Compete Obligations For The Unemployed”, The Employment Brief (Dec. 31, 2012) available at: http://theemploymentbrief.com/2012/12/31/proposed-maryland-legislation-would-eliminate-non-compete-obligations-for-the-unemployed/              

V. Federal Trade Commission Exhibits Interest in Non-Competes as a Regulatory Matter

On January 18, 2013, the FTC issued a press release in In the Matter of Oltrin Solutions, LLC, JCI Jones Chems., Inc., Olin Corp.; & Trinity Mfg., Inc., FTC File No. 111:0078 (Jan. 18, 2013) indicating that it was seeking public comment on a proposed consent order designed to reverse a transaction between JCI Jones Chemicals, Inc., and Oltrin Solutions, LLC in March 2010 which included an agreement between the two companies that JCI would not sell bulk bleach in North or South Carolina for a period of six years.  The FTC’s proposed consent order indicates that the Commission determined that the agreement was in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45.  The period for public comment closed on February 21, 2013. 

VI. DOJ, in Fits and Spurts, Pursues Sherman Act Theories Regarding “No Poaching” Agreements

On November 17 2012, the Department of Justice filed suit against EBay under the Sherman Act, alleging that EBay and Intuit had entered into both informal and formal agreements not to hire each other’s key employees.  On January 22, 2013, EBay moved to dismiss based, in part, on the theory that such an agreement does not meet the test for a per se Sherman Act violation.  In so doing, EBay argued that no-hiring agreements between competitors should be judged by a “reasonableness” standard, and should not be analogized to price-fixing or bid-rigging schemes.  Essentially, EBay argued that a no-hire agreement was simply a limited form of a non-compete agreement, and should be judged by the same sort of reasonableness test to which other non-compete agreements are subject. 

For more analysis, See

·        Jonathan Lewis, “No Poaching Here – ‘No-Hire/Non-Solicitation’ Provisions in Transactional Agreements”, Antitrust Advocate (Dec. 6, 2012) available at: http://www.antitrustadvocate.com/2012/12/06/no-poaching-here/

·        Kenneth Vanko, “EBay Moves to Dismiss DOJ Antitrust Complaint”, Legal Developments in Non-Competition Agreements (Jan. 25, 2013) available at: http://www.non-competes.com/2013/01/ebay-moves-to-dismiss-doj-antitrust.html

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Virginia Federal District Court Approves a Choice of Law Clause That Provides for Blue-Penciling

Virginia does not permit blue-penciling in non-compete agreements governed by Virginia law.  Lanmark Tech., Inc. v. Canales, 454 F. Supp. 2d 524 (E.D. Va. 2006); Strategic Enter. Solutions, Inc. v. Ikuma, 77 Va. Cir. 179 (Va. Cir. Ct. 2008); Better Living Components, Inc. v. Coleman, 67 Va. Cir. 221 (Va. Cir. Ct. 2005).

In Edwards Moving & Rigging, Inc. v. W.O. Grubb Steel Erection, Inc., 2012 U.S. Dist. LEXIS 56818 (E.D. Va. April 23, 2012), plaintiff, a Kentucky-based company, entered into a non-compete with its then-employee, defendant White, who then resided in Kentucky.  The non-compete prohibited defendant White from working for, either directly or indirectly, any of plaintiff’s competitors within the company’s “market area” for a period of two years after the termination of his employment.  Plaintiff alleged that the “market area” included Virginia. 

The non-compete agreement also contained a “reasonableness” provision, prohibiting defendant White from raising any issue regarding the reasonableness of the agreement’s scope or duration.  Most importantly, for the purposes of this case, the non-compete agreement contained a choice of law clause which provided that the agreement was to be construed under and governed by the law of Kentucky without reference to Kentucky’s conflicts of law rules. 

After defendant White’s employment ended, and within the two-year period following termination, defendant White accepted employment with defendant W.O. Steel Erection, Inc. (“Grubb”).  When plaintiff discovered that defendant had accepted employment with a competitor in Virginia, it advised Grubb of the non-compete agreement.  Defendant Grubb declined to sever its employment relationship with defendant White, and litigation ensued.  When plaintiff filed a two-count complaint in federal district court in Virginia, the defendants moved to dismiss the action, arguing that the choice of law clause ought not be enforced, as they contended it contravened Virginia public policy.  Defendants argued that the Court would be required to re-write, or “blue-pencil” the non-compete, as it was overbroad and that to do so would contravene Virginia public policy. 

Judge Hudson ruled that the fact that Virginia does not allow “blue penciling”, whereas Kentucky does, was immaterial.  The Court, citing Jones v. Dent Wizard Int’l, Corp., No. CL02-386, 2002 WL 32254731, 2002 Va. Cir. LEXIS 463 (Va. Cir. Ct. June 14, 2002) held that to permit “blue-penciling” is not so repugnant to Virginia public policy as to overcome Virginia’s preference for enforcing choice-of-law clauses. 

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