Tag Archive for: trade secrets

Colorado passes new law severely limiting restrictive employment agreements, including non-competes, non-solicits and even some non-disclosures

Colorado passed HB 22-1317, which severely limits restrictive employment agreements, including non-competes, non-solicits and even some non-disclosures. HB 22-1317 is currently before the Governor where it is expected to become law without veto.

HB 22-1317 applies only to agreements containing such provisions if entered into on or after 8/10/2022; however, the Act contemplates the possibility that a referendum petition will be filed by voters to contest it, in which case HB 22-1317 provides it will be held in abeyance without any part taking effect until after the November 2022 state election. Absent a successful challenge by referendum in this fall’s vote, HB 22-1317 will entirely restructure Colorado’s longstanding law in this area, CRS 8-2-113.

First, like existing Colorado law, HB 22-1317 renders void all non-competes unless they fall into certain defined exceptions. However, unlike existing Colorado law, HB 22-1317 significantly limits the available exceptions to only the following three categories:

  1. Covenants associated with the sale of a business, which can include sales arranged as so-called asset deals.
  2. Covenants that (a) are no broader than what is reasonably necessary to protect trade secrets (b) so long as the individual earns enough to qualify as a “highly compensated worker,” a legally defined phrase with a minimum earning level set by the CDLE, currently at $101,250 per year. Note: HB 22-1317 does not permit such covenants for the protection of mere confidential information; the information must instead rise to the level of a “trade secret” as otherwise defined in and protected by Colorado law.
  3. Mere non-solicits for customers (not non-competes) if the worker earns at least 60% of the “highly compensated worker” amount (currently $101,250×60%=$60,750 per year).

Note: Under HB 22-1317 there is no longer an exception permitting non-competes for “executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.”

Second, each of those three exceptions are available only after a new written notice is provided. HB 22-1317 will require that written notice be provided (a) to prospective workers before the worker accepts the offer of employment and (b) to current workers at least 14 days before the covenant will be effective or additional compensation is provided or a change in the employee’s terms or conditions of employment occurs as consideration for the covenants, whichever is earlier. The written notice must be provided in a document separate from whatever document contains the covenants. It must be written in “clear and conspicuous terms in the language in which the worker and employer communicate about the worker’s performance.” It must be signed by the worker. Copies must be made available upon request by the worker once per year. The notice must either provide a copy of the agreement containing the covenant or identify that agreement “by name and state() that the agreement contains a covenant not to compete that could restrict the workers’ options for subsequent employment following their separation from the employer.” The notice must “direct() the worker to the specific sections or paragraphs of the agreement that contain the covenant not to compete.”

HB 22-1317 makes additional revisions to an employer’s ability to impose covenant-like restrictions in the event the employer provides employer-paid training (which does not generally include “normal, on-the-job” training) and in situations involving physicians.

Next, HB 22-1317 prohibits non-disclosure agreements (confidentiality agreements) to the extent they seek to protect “general training, knowledge, skill or experience whether gained on the job or otherwise.” Nor can such an agreement apply to “information that is readily ascertainable to the public, or information that a worker otherwise has a right to disclose as legally protected conduct.”

It is not clear from HB 22-1317 if its written notice requirements apply to non-disclosure agreements (confidentiality agreements). It appears on its face as drafted that HB 22-1317 only requires such written notice for covenants not to compete, which may include non-solicits (to the extent within the above three exceptions) and not for a non-disclosure agreement (confidentiality agreement) that contains no non-compete and no non-solicit.

HB 22-1317 also prohibits contrary choice of law and choice of forum provisions; if a worker resides primarily in or works in Colorado, at the time of termination, Colorado law will apply, and the worker may not be required to litigate outside of Colorado.

HB 22-1317 imposes new penalties and permits the Colorado Attorney General to take action directly against a violating employer. Both employees and the Colorado Attorney General can bring a declaratory action to invalidate violative covenants.

Employers should review all agreements containing covenants in Colorado. This includes not only formal non-compete/non-solicit agreements, but also confidentiality (non-disclosure, aka proprietary information agreements). This includes all agreements such clauses, for example, any equity incentive agreements, restrictive stock grants, stock option awards, etc. Employers are reminded to review not only for going-forward compliance in terms of such covenants but also their choice of law and choice of forum provisions.

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Supreme Court rules CFAA is not available in most employment lawsuits involving trade secrets, NDA’s, non-competes and non-solicits

Resolving a long-running split among the lower courts, the Supreme Court has, unfortunately for employers, held that the CFAA (Computer Fraud and Abuse Act) is not available in most lawsuits against current and former employees involving trade secrets, NDA’s, non-competes and non-solicits. The CFAA is a powerful federal law that allows enhanced remedies for companies who are the victim of someone using their computers “without authorization.” It has, in many jurisdictions, been the frequent basis for lawsuits against current and former employees who use computers and the data on computers, such as customer lists, pricing information and other trade secrets or confidential information, to compete against their employers.

Many jurisdictions had held that, as soon as an employee undertakes a disloyal act — such as violating an NDA, non-compete, or common law breach of loyalty — any subsequent use, including access, of their employer’s computers, including data on those computers, is “without authorization.”

The Supreme Court rejected that position and held, instead, that the CFAA only “covers those who obtain information from particular areas in the computer — such as files, folders, or databases — to which their computer access does not extend. It does not cover those who … have improper motives for obtaining information that is otherwise available to them.”

Why would the Supreme Court strip employers of such a valuable tool for protecting their confidential information? Remember the CFAA was only used in such situations when — and because — the employee violated the company’s rights. The majority was concerned that the CFAA also includes criminal penalties. Indeed the case arose as a criminal prosecution. The majority reasoned that permitting the CFAA to cover those whose use was unlawful due to an “improper motive” would result in a “breathtaking” number of criminal cases. A 3-justice dissent disagreed, but until and unless Congress amends the CFAA, the Supreme Court’s decision has stripped employers of a previously valuable tool.

Employers (and employees) involved in or anticipating lawsuits that include CFAA claims should immediately review the Supreme Court’s decision and its impact on their litigation.

Source: Van Buren v. U.S., case no. 19-783 (6/3/2021).

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Employers don’t face either-or decision when recovering for civil theft

A recent Colorado Supreme Court decision addressed what is known as the Economic Loss rule. Under the Economic Loss rule, a victim of wrongdoing who has a contract claim for the same wrongdoing is limited to recovering only the economic losses for breach of the contract.

In this case, an employee expected to be involved in a lawsuit with his employer. In order to prepare himself for the lawsuit, he emailed himself thousands of company emails to use as evidence. The problem was, the employer contends, that violated his employment agreement and constituted, among other things, theft from the company. When he eventually sued the company, the company counterclaimed for breach of the employment agreement, civil theft, and other claims. The employee cited the economic loss rule, saying that if what he did was wrong, then it constituted a violation of his employment agreement, and as such, his former employer was entitled to recover only the economic losses flowing from the breach of his employment agreement … not any of the other remedies available under its other claims, including statutory penalties and attorney fees.

The Colorado Supreme Court rejected the employee’s argument and held that the economic loss rule did not prohibit recovery especially under the Colorado civil theft statute. As the Court explained, the legislature had created the civil theft statute in order to impose enhanced penalties, which “strongly suggests that the section was intended to serve primarily a punitive, rather than a remedial purpose. ”

The case is a strong reminder to employees who are considering violating their employer’s rights by emailing themselves information. Employees cannot take it upon themselves to stockpile evidence in anticipated litigation. Likewise, the case is a reminder for employers who become the victims of such misconduct that they have strong legal rights of their own.

Source: Bermel v. BlueRadios, Inc., case no. 17SC246 (5/6/19).

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NLRB General Counsel issues memo outlining likely reversals to Obama-era precedents

As previously reported here in this blog, the Trump Board (NLRB Boards are often colloquially but not pejoratively referred to by the President during their term) has begun overruling Obama-era precedents. Further reversals are anticipated. Curious which Obama-era NLRB precedents are likely to be reversed?

NLRB General Counsel Robb issued a controversial memo, shortlisting the cases he thinks most warrant attention. Indeed to call it a shortlist is a stretch. The General Counsel lists 26 categories, that range from employee access to email, to protections for section 7 rights, obscene and harassing behavior, off-duty access to property, the Weingarten right to have a representative present, rights of employees during contract negotiations, successorship and of course the joint employer doctrine, unilateral changes consistent with past practice, information requests during the processing of a grievance, dues check-offs, remedies, deferral, and, well, the list goes on, as will employers’ need to stay tuned to forthcoming developments at the Board.

Source: NLRB General Counsel Memorandum GC 18-02.

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Tenth Circuit reaffirms need for irreparable harm to obtain injunction in trade secrets case

Both federal and state law (respectively, the Defend Trade Secrets Act (DTSA) and Colorado’s Uniform Trade Secrets Act (CUTSA)) authorize a company to obtain a preliminary injunction against a former employee who is using or threatening to use its trade secrets. The Tenth Circuit recently reaffirmed that, among the requirements for such an injunction, is proof of irreparable harm. (The other requirements are (1) substantial likelihood of success once the merits of the case are decided, (2) the threatened injury outweighs the harm of the injunction, and (3) the injunction will not be adverse to the public interest.)

To be “irreparable” the harm that will be suffered but for the preliminary injunction must be the kind that cannot be reversed, repaired or even compensated for in damages.

In this case, the trial court found that the harm the former employer would suffer if no injunction was issued could be compensated for in damages. In other words, quoting the trial court, it could be “reasonably quantified” in terms of dollars, and such an award of damages “would have adequately made (the company) whole.” Typically that is enough to show such harm is not “irreparable” and therefore a preliminary injunction should be denied.

However, the trial court decided that no showing of actual harm was necessary to prove the irreparable harm element; it decided that the element of irreparable harm could instead be presumed. The court so decided “because both the DTSA … and the CUTSA … provide for injunctive relief.”

The Tenth Circuit reversed. The Tenth Circuit held that legislatures can create presumptions of irreparable harm but to do so they need to say so. Both DTSA and CUTSA lack such language. They merely allow for injunctive relief:

DTSA and CUTSA … merely authorize and do not mandate injunctive relief and thus do not allow a presumption of irreparable harm.

Without a presumption of irreparable harm and lacking proof of irreparable harm, the Tenth Circuit reversed.

The case illustrates the need to prove irreparable harm, in order to obtain a preliminary injunction in cases involving trade secrets. The case is also a reminder that irreparable harm cannot exist where monetary damages will make the plaintiff whole.

Source: FIRST WESTERN CAPITAL MANAGEMENT COMPANY v. MALAMED, Court of Appeals, 10th Circuit 2017 – Google Scholar

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$1.3-million verdict overturned, where design was held to be publicly known, despite efforts to keep it confidential as a trade secret

Although publicly known information can be combined in proprietary ways that create a trade secret, the Colorado Court of Appeals held that a design that is not “a secret in the first place,” in other words, that is a matter “of public knowledge or of general knowledge in an industry” is not, itself, a trade secret, no matter how hard its owner works to keep it confidential, the design does not become a trade secret.

Lacking protection as a trade secret, the Court of Appeals reversed a jury’s $1.3-million verdict in this case for misappropriate in violation of Colorado’s trade secret laws.

The decision is a sharp reminder of the limitations imposed by Colorado law on companies seeking to claim trade secrets. The determination whether information constitutes a trade secret is often crucial in non-compete and non-solicit cases.

The case was Hawg Tools, LLC v. Newsco international Energy Services, Inc. — P.3d — (Colo.App. 2016).

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