Trade Secrets & Employee Mobility

Despite the Supreme Court’s recent 6-3 ruling in West Virginia v. EPA that regulatory agencies must have “clear congressional authorization” to make rules pertaining to “major questions” that are of “great political significance” and would affect “a significant portion of the American economy,” and the import of that ruling to the area of noncompete regulation (which we addressed in detail in Law360), the Federal Trade Commission (FTC) and National Labor Relations Board (NLRB) announced yesterday that they are teaming up to address certain issues affecting the labor market, including the regulation of noncompetes.

In a Memorandum of Understanding (MOU) issued on July 19, 2022, the FTC and NRLB shared their shared view that:

Welcome to Spilling Secrets, a new monthly podcast series on the future of non-compete and trade secrets law.

If you’re hiring from a competitor amid the Great Resignation, one of your top priorities is not getting sued.

Washington, D.C. employers will not need to scrap all their non-compete agreements after all.  On July 12, 2022, the D.C. Council (the “Council”) passed the Non-Compete Clarification Amendment Act of 2022 (B24-0256) (the “Amendment”), which among other things, tempers the District’s near-universal ban on non-compete provisions to permit restrictions for highly compensated employees.  For further analysis on the original D.C. Ban on Non-Compete Act, please see our previous articles here and here.

The Council delayed the initial ban several times in response to feedback from employer groups.  However, barring an unlikely veto or Congressional action during the mandatory review period, the amended ban will take effect as of October 1, 2022.  We detail the key revisions to the ban below.

Since the Supreme Court’s decision in Dobbs v. Jackson Women’s Health Organization, state legislatures across the country have accelerated their discussion of new laws either restricting or further protecting access to abortions.  A state senate bill in South Carolina, S. 1373 currently pending in the Senate Committee on Medical Affairs, would not only ban almost all abortions in that state, but would also afford novel whistleblower protections. Specifically, S. 1373 imposes criminal penalties, punishable by imprisonment for ten years, for persons who “take any action to impede a whistleblower from communicating about a violation of this article with the Attorney General, a solicitor, or any other person authorized to bring an action in violation of this article.”

As we previously reported, the Colorado General Assembly passed a bill in May making substantial amendments to Colorado’s noncompete statute, C.R.S. § 8-2-113. Governor Jared Polis signed the bill on June 8, 2022, meaning the amendments will go into effect at 12:01 a.m. on August 10, 2022, which is only four weeks away. That may sound like a long time, but it will go by quickly.

Several states over the past few years have passed legislation prohibiting the use in noncompete agreements (and other employment-related agreements) of out-of-state choice-of-law and forum selection provisions. A few of these states’ laws include enforcement mechanisms with stringent penalties, such as California, which provides for injunctive relief and attorneys’ fees to an aggrieved employee; Washington, which entitles aggrieved employees to actual damages or statutory penalties of $5,000, as well as their attorneys’ fees; and, beginning in August, Colorado, where any violation of that state’s noncompete statute (including the prohibition on out-of-state choice-of-law and forum selection provisions) could lead to civil and criminal penalties.

Exchange Act Rule 21F-17, adopted in 2011 under the auspices of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, prohibits any person from taking any action to impede an individual from communicating directly with the SEC, including by “enforcing, or threatening to enforce, a confidentiality agreement . . . .”  The SEC has prioritized enforcing this rule expansively, by requiring employers to provide SEC-specific carveouts to policies and agreements governing confidentiality.  According to an Order issued last week against The Brink’s Company ( “Brink’s” or “Brinks”), the SEC seems to suggest that employers must provide a specific carveout in restrictive covenant agreements permitting employees and former employees to report information to the SEC in addition to the statutory disclosure provided for in the federal Defend Trade Secrets Act (DTSA).

As readers of this blog are aware, many states now require employers to provide prospective employees with copies of any noncompetes (and, in some cases, other restrictive covenants) they will be required to sign as a condition of employment. For example, Massachusetts requires that noncompetes be provided at the earlier of when an offer is made or 10 business days before the first day of employment; in Illinois it is 14 calendar days before employment begins; in Maine it is three days; in New Hampshire and Washington a noncompete must simply be provided before an employee’s acceptance of an offer; in Oregon and Rhode Island it is two weeks before employment begins; and beginning August 9, 2022, Colorado will require not only that both noncompete and non-solicitation covenants be provided to employees at least 14 days before the effective date of employment, but a separate standalone notice must be provided as well.

You don’t hear much positive news these days about noncompete agreements. Instead, most national media outlets take cases of extreme abuse and frame them as the norm instead of the outliers that they are. And the national media also often portrays employers in a negative light for allegedly forcing noncompetes on employees who purportedly have no choice in the matter and receive no benefit from the transaction. The data does not bear this out—indeed, according to reputable studies, workers who are presented with noncompetes before accepting jobs receive higher wages and more training, and are more satisfied in their jobs than those who are not bound by noncompetes—but that is beside the point when there is an attention-grabbing story to be written.

Microsoft Corp. announced last week that it is immediately eliminating noncompetes for all employees below the partner and executive levels, including doing away with all existing noncompetes for covered employees. In a June 8, 2022 blog post, Microsoft’s Deputy General Counsel and Vice President of Human Resources said the following:

Empowering employee mobility: Microsoft believes that all employees should be empowered to work at a company they love and in a role where they thrive. We work hard to retain our world-class talent by making people the priority, and creating a culture that attracts and inspires world-class talent to unlock innovation aligned to our mission. While our existing employee agreements have noncompete obligations, we do not endorse the use of such provisions as a retention tool. We have heard concerns that the noncompetition clauses in some U.S. employee agreements, even when rarely and reasonably enforced, feel at odds with our talent principles. With these concerns in mind, we are announcing that we are removing noncompetition clauses from our U.S. employee agreements, and will not enforce existing noncompetition clauses in the U.S., with the exception of Microsoft’s most senior leadership (Partners and Executives), effective today. In practice, what this means is those U.S. employees will not be restricted by a noncompete clause in seeking employment with another company who may be considered a Microsoft competitor. All employees remain accountable to our standards of business conduct and other obligations to protect Microsoft’s confidential information. (Emphasis added).