Category: Labor & Employment

USCIS Introduces Redesigned Employment Authorization Document: Form I-766

Recently posted in the National Law Review an article by attorneys Eric S. Bord , A. James Vázquez-Azpiri , Lance Director Nagel, Lisa Stephanian Burton of Morgan, Lewis & Bockius LLP regarding a redesigned Form I-766, Employment Authorization Document:

 

U.S. Citizenship and Immigration Services (USCIS) has released a redesigned Form I-766, Employment Authorization Document, commonly referred to as an “EAD card.” Part of USCIS’s larger effort to eliminate document fraud, the redesign enhances the card’s security features to discourage tampering and misuse. The enhanced security measures include optically variable ink along the top of the card and a holographic image on the front of the card.

How does the redesigned EAD card affect employers’ Form I-9 compliance obligations?

The redesigned EAD card serves the same purpose as the prior version and will remain a “List A” document for employment verification purposes. “List A” documents establish a worker’s identity as well as his or her authorization to work in the United States.

An applicant for employment may still present a valid and unexpired prior version of Form I-766/EAD card to satisfy Form I-9 document requirements. The redesigned Form I-766 will be phased in incrementally. Foreign nationals in possession of the prior version will only receive the redesigned EAD card to replace a lost or stolen card or upon a card’s expiration. A foreign national can apply for a new card no more than 120 days prior to expiration date.

Copyright © 2011 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Talent Shortage: A Top Risk Facing Businesses

Recently Posted in the National Law Review an article by Emily Holbrook of Risk and Insurance Management Society, Inc. (RIMS) about  the shortage of talent and skills in hiring:

 

 

No, it’s not the credit crisis or the looming threat of cyber crime or business continuity during a natural disaster or the overall state of the national economy that keeps American business owners awake at night. It is, according to most, the shortage of talent and skills.

This may seem strange, seeing as were are still experiencing record unemployment numbers — meaning the pool of seemingly qualified employees should be vast to say the least. But in fact, the 2011 Lloyd’s Risk Index found that talent and skills shortage ranked as the number two risk facing American business leaders — shooting up from the number 22 spot in 2009.

“These findings show that talent is now firmly part of the risk lexicon — high levels of unemployment have boosted the quantity of candidates, but employers are still wrestling with the quality. Our own Global Talent Index echoed these concerns and highlighted two factors underscoring this risk: population demographics and skills gaps,” said Kevin Kelly, CEO of Heidrick & Struggles the leadership advisory firm providing executive search and leadership consulting services worldwide.

Are business leaders prepared to handle not only the number two risk on the list, but all 50 in the index? Apparently they are. Respondents said they are more than adequately prepared for 48 out of the 50 risks listed. That is in comparison to 2009, when leaders said they were not adequately prepared for eight of the 40 listed risks. Leaders cited “boosting talent retention” as one of the most overall effective risk management actions taken over the last three years, showing how eager businesses are to retain the staff they have.

Speaking of risk management, when respondents were asked to identify the most effective risk management action their organization had taken over the last three years, they cited the introduction of formal risk management strategies and systems, stating that “risk management is now one of the most important roles in the business community.”

Finally.

It may have taken the collapse of the U.S. housing market, a worldwide recession and the continuous uncovering of massive fraud to push the idea of risk management to the forefront of global business programs, but at least the discipline is now moving to where it belongs.

And it is apparently now focused on retaining the talent and skills that are greatly needed in a business world full of continuously evolving risks.

Risk Management Magazine and Risk Management Monitor. Copyright 2011 Risk and Insurance Management Society, Inc. All rights reserved.

Non-Compete Agreements: A Brave New World in Illinois

Posted on December 8th in the National Law Review an article by attorney Anthony C. Valiulis of  Much Shelist Denenberg Ament & Rubenstein P.C. regarding Illinois Supreme Court’s recent changes regarding non-compete & non-solicitation agreements:

 

 

On Thursday, December 1, 2011, the Illinois Supreme Court dramatically changed state law regarding non-compete and non-solicitation agreements. In Reliable Fire Equipment Company v. Arredondo, the court adopted a new test for determining the enforceability of an employee restrictive covenant.

For the last 30 or so years, Illinois courts have generally held that there were essentially only two “legitimate business interests” that could support a restrictive covenant in the employment context: (1) a company’s confidential information or (2) near-permanent relationships with customers. As we have discussed in previous articles, the Fourth District rejected this test in Sunbelt Rentals, Inc. v. Ehlers, holding that a restrictive covenant could be upheld regardless of the existence of a legitimate business interest—provided that the scope of the covenant was reasonable. The Second District rejected Sunbelt in the Reliablecase but held open the possibility that there could be more than the two traditional legitimate business interests. In the Second District Court’s decision, the concurring opinion felt that the test should be based on the totality of the circumstances involved in each particular case. It was this position that the Illinois Supreme Court adopted in its December 1 opinion.

According to the Illinois Supreme Court, for an employee restrictive covenant to be enforceable, its restrictions must be “(1) no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor; and (3) is not injurious to the public.” That has been pretty much the law for the last 30 years. But the important portion of the Reliable decision relates to the test for determining whether a legitimate business interest exists. It is here that the Illinois Supreme Court has created a brave new world.

According to the Reliable court, “[W]hether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case.” In reviewing that totality, a court is to consider various factors, including but not limited to “the near-permanence of customer relationships, the employee’s acquisition of confidential information through his [or her] employment, and time and place restrictions.” But the Illinois Supreme Court made it clear that these factors are not exclusive. Moreover, “[N]o factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.”

So what does all this mean? Well, we now have a clear statement, articulated by the state’s highest court, of the test for enforceability. But what we do not have is certainty. Under this “totality of the circumstances” test, it will be very difficult to determine whether a particular restrictive covenant will be enforceable or not. As these cases are litigated over time, more certainty will undoubtedly arise. As of now, however, we can only speculate about what additional factors will be important. Goodwill is likely to be one. So might an employee’s unique value.

What is a business to do in the wake of the Reliable decision? First and foremost, all existing restrictive covenants should be reviewed to determine, under the particular set of facts applicable to your business, what might be enforceable. Although there is no certainty, there are drafting measures that can and should be taken to help make your agreements fit into this brave new world.

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

NLRB Approves Significant Changes to Representation Election Procedures

Recently published  in The National Law Review an article byJ. Kevin Hennessy, Kenneth F. Sparks, Mark L. Stolzenburg and Lyle S. Zuckerman of Vedder Price P.C. regarding NLRB’s vote at a public meeting on November 30, 2011:  

In June 2011, the National Labor Relations Board issued a Notice of Proposed Rulemaking that sought to significantly change the procedures for representation elections under the National Labor Relations Act. The purpose of the Proposed Rulemaking was to limit the time that an employer has to express its views to employees regarding unionization during a campaign. The NLRB held two days of hearings in July 2011 regarding the proposed rule and received over 65,000 written comments.

At a public meeting on November 30, 2011, by a 2-1 party-line vote, the NLRB voted in favor of a resolution to adopt many provisions of the rule proposed in June. While some of the more controversial provisions were not included, the amendments that the NLRB approved in its November 30 resolution will quicken the election process.

That said, the Board still must draft a final rule and vote on it. However, with the recess appointment of Board Member Craig Becker expiring on December 31, 2011, the Board will lose its three-member quorum and therefore will be unable to adopt rules or otherwise conduct business in any significant manner after that date. Senate Republicans have announced that they will remain in session between now and the 2012 elections, depriving President Obama of the ability to make any additional recess appointments to the NLRB. As a result, employers should expect that the Board will move quickly to prepare and vote on a final rule within the next few weeks.

The resolution that the Board adopted on November 30 contains six procedural amendments to be included in the final rule regarding changes to the election process:

1.  The final rule would amend the existing rule regarding the purpose of pre-election hearings, making them for the sole purpose of determining “whether a question concerning representation exists that should be resolved by an election.” The primary effect of this rule is to preclude litigation about most voter-eligibility issues, such as supervisory status, during pre-election hearings. It is unclear whether this would preclude parties from litigating the overall appropriateness of the petitioned-for bargaining unit. The resolution appears to be more restrictive than the rule proposed by the Board in June 2011, which would have allowed the parties to litigate eligibility issues in a pre-election hearing if those issues involved at least 20 percent of the proposed voting unit.

2.  Under current rules, parties may file post-hearing briefs as a matter of right. The amended rule leaves to the discretion of the hearing officer whether post-hearing briefs will be permitted. In most cases, the parties will be allowed to make closing arguments at the end of the hearing, and briefs will be permitted only where unique or complicated issues are involved.

3.  Current rules require parties to file separate appeals to seek Board review regarding pre-election and post-election issues. The amended rules eliminate all pre-election review by the Board, and will consolidate all issues for review, including election objections, in a single, post-election appeal. According to Chairman Pearce, this will avoid appeals of issues “that become moot as a result of the election.”

4. The fourth amendment eliminates the 25- to 30-day waiting period between issuance of a Regional Director’s Decision and Direction of Election and the scheduling of an election. The purpose of this waiting period is to allow parties to request review of the Regional Director’s decision by the Board, a process that is eliminated by the third amendment.

5. The fifth amendment would limit to “extraordinary circumstances” occasions when requests for special permission to appeal to the Board would be granted. Under this standard, the Board would entertain pre-election appeals only when the issue would “otherwise evade review.”

6. Currently the Board must consider any post-election requests for review. The sixth amendment would make Board review of post-election appeals discretionary, permitting the Board to summarily dispose of appeals “that do not present a serious issue for review.” This is the same standard that currently exists for pre-election reviews.

Several components of the rule proposed in June were not included in the Board’s resolution adopted on November 30. Those are (i) inclusion of employee e-mail address and telephone number on voter-eligibility lists provided to the union before the election, (ii) reducing the time that an employer has to provide the voter eligibility list to the union from seven to two days, (iii) requiring parties to state their positions regarding pre-election issues prior to the hearing and (iv) requiring an employer to provide a “preliminary voter list” before the pre-election hearing. However, on November 30, the Board reserved its right to continue considering these elements of the June rulemaking session.

As NLRB Member Brian Hayes noted at the November 30 public meeting during which the Board voted to adopt the resolution, the median time between the filing of a petition and an election in 2010 was 38 days, and about 95 percent of all elections occur within 56 days. The time target in most cases is for an election to occur within 42 days of the filing of a petition. The amendments approved in the Board’s resolution may have little effect on elections in which the parties agree about the composition of the voting unit and other details without a hearing. However, where there is a dispute over the eligibility of certain voters, elections will occur much more quickly than in the past. In addition, the amendments may increase uncertainty for employers during campaigns. Issues of supervisory status will not be resolved until after an election is over. As a result, employers may be placed at increased risk of unfair labor practice allegations for the conduct of individuals who were not deemed supervisors until long after a campaign concluded.

As a result of these rules that the NLRB is soon to adopt, employers should review their contingency plans for organizing drives and give serious thought to the content of condensed campaigns. Shorter election campaigns may soon be a reality.

© 2011 Vedder Price P.C.

Allegations of Sexual Harassment and Sexual Violence: What Must a School Do?

Recently posted in the National Law Review  an article by attorney Stephen A. Mendelsohn of Greenberg Traurig, LLP regarding universities examining their policies and procedures concerning the investigation and resolution of sexual harassment and sexual violence allegations:

GT Law

Recent events at major universities should cause schools to critically examine their policies and procedures concerning the investigation and resolution of sexual harassment and sexual violence allegations. This GT Alert examines what an institution must do to limit its potential exposure to lawsuits alleging sexual harassment or sexual violence by students upon students or by faculty or staff upon students.

TITLE IX

All educational institutions that receive federal financial assistance are subject to Title IX of the Education Amendments of 1972 (Title IX), 20 U.S.C. sections 1681et seq. and the United States Department of Education (DOE) implementing regulations, 34 C.F.R. Part 106, which prohibit discrimination on the basis of sex. Sexual harassment, which includes sexual violence, covers student-student, studentstaff/faculty and faculty-faculty conduct. The DOE’s Office of Civil Rights (OCR), on April 4, 2011, published a “Dear Colleague” letter that reiterates a school’s legal obligations to investigate and resolve sexual harassment and sexual violence complaints and warns schools that they must comply with Title IX and DOE, OCR regulations or face DOE sanctions.

A School’s Obligations to Respond to Sexual Harassment and Sexual Violence Complaints

Determining what constitutes sexual harassment and sexual violence is often difficult. Though some instances are seemingly obvious, many cases turn on the issue of consent. Title IX does not prohibit all forms of sexual behavior between consenting adults. Rather, it prohibits sexual acts perpetuated against a person’s will or where a person is incapable of giving consent due to the victim’s abuse of drugs or alcohol. A person may not give consent due to intellectual or other disabilities. Whether proper consent has been given is often a challenging issue.

Where students participate in a school’s education programs and activities, Title IX is applicable. It is also applicable, for example, where student upon student sexual harassment or sexual violence occurs off campus and does not involve school programs or activities.

A school that knows, or reasonably should know, about possible sexual harassment or sexual violence must promptly investigate what may have happened and must also take appropriate steps to resolve the situation. Even if the matter is subject to a law enforcement investigation, the school must conduct its own investigation. If a school has reason to believe that there may have been criminal conduct, the school must immediately notify law enforcement officials.

Schools must also navigate through the Family Educational Rights and Privacy Act (FERPA), 20 U.S.C. section 1232g; 34 C.F.R. 99.15. Though FERPA protects student confidentiality, a school may not withhold the identity of the complainant from the alleged harasser.

Procedural Requirements for Sexual Harassment and Sexual Violence Investigations

Under Title IX, schools must, at a minimum, take three procedural steps in investigating sexual harassment and sexual violence complaints. These include:

  • Disseminating a Notice of Discrimination;
  • Designating at least one employee to serve as a Title IX coordinator;
  • Adopting and publishing grievance procedures for prompt and fair resolution of student and employee sex discrimination complaints.

Whether a school’s Notice of Discrimination complies with Title IX requires the application of the DOE, OCR’s regulations. A Title IX coordinator must have adequate training in Title IX’s policies and procedures.

Title IX requires that grievance procedures be published and that they provide a prompt and fair process. Though the grievance procedures need not be separate from normal student disciplinary procedures, they must include:

  • Notice to students and employees of the procedures and where complaints may be filed;
  • Adequate and impartial investigations carried out by employees where both parties have the right to present witnesses and evidence;
  • Designated and reasonably prompt time frames for the process;
  • Notice to the parties of the outcome;
  • Steps taken to prevent recurrence and correct discriminating effects.

Risk Management

Victims of sexual harassment and sexual violence have the right to seek monetary damages against schools for student upon student and faculty/staff conduct where the school is deliberately indifferent to the victim’s complaints. Davis v. Monroe County Bd. of Ed, 119 S. Ct. 1661(1999). Compliance with Title IX and the DOE, OCR’s regulations, along with a full and fair investigation and grievance process, provides a defense to a lawsuit. In the absence of Title IX and DOE regulatory compliance, or the failure to apply existing school policies and procedures, schools will invite Title IX actions.

A thorough review and assessment of Title IX, DOE, OCR regulations and existing policies and procedures is key to avoiding monetary liability for sexual harassment and sexual violence and in aiding victims.

©2011 Greenberg Traurig, LLP. All rights reserved.

Brief Filed in Litigation Challenging the NLRB’s Final Rule Requiring All Employers to Post Notice of Employee Rights Under the NLRA

Recently posted in the National Law Review  an article by Labor & Employment Practice of Morgan, Lewis & Bockius LLP regarding the NLRB’s Final rule:

 

 

On August 25, the National Labor Relations Board (NLRB or Board) issued a Final Rule (Rule) that requires all employers subject to the Board’s jurisdiction—i.e., the vast majority of employers doing business in the United States—to post a notice in the workplace informing employees of their right, among other things, to “[o]rganize a union,” to “take action . . . to improve your working conditions by, among other means, raising work-related complaints directly with your employer or with a government, and seeking help from a union,” and to “strike and picket.”

Under the Rule, the notice must be posted in the same place where other employment-related notices are posted, which may include the employer’s intranet or Internet site if the employer customarily communicates with its employees by such means. Failure to post the notice could have three adverse effects: (1) it will be an unfair labor practice under Section 8(a)(1) of the National Labor Relations Act (NLRA), (2) it could toll the six-month statute of limitations for filing unfair labor practices, and (3) it could be used as evidence of an employer’s unlawful motive in unfair labor practice cases.

The Rule is scheduled to go into effect on January 31, 2012.

The Status of the Litigation Challenging the Rule

After the Rule was announced, three separate lawsuits were filed in federal court to block its implementation: two in Washington, D.C. (which were consolidated into one case) and one in South Carolina. The cases challenge, among other things, the NLRB’s authority to issue the Rule.

Cross-motions for summary judgment were filed on October 26 in the District of Columbia action and on November 11 in the South Carolina action. On November 15, John Kline, the Chairman of the House of Representatives’ Committee on Education and the Workforce, along with 35 other members of the House of Representatives, filed in both pending cases an amicus brief supporting the challenge to the Board’s authority to issue the Rule.

The amicus brief was authored by Morgan Lewis attorneys, led by Philip Miscimarra and including former NLRB member Charles Cohen. “Our brief was filed on behalf of thirty-six members of Congress, including John Kline, Chairman of the House Committee on Education and the Workforce, many other members of that Committee, and additional House Members. Their interest in the litigation stems from the fact that legislative decisions are reserved for Congress. The Members we represent believe the NLRB’s creation of a notice-posting obligation—which Congress did not place into the National Labor Relations Act—is contrary to the NLRA and exceeds the NLRB’s authority,” Miscimarra said.

The brief highlights for the first time in either litigation important legislative history showing that the original version of the NLRA contained a notice provision and a specific unfair labor practice relating to the notice provision. Led by Senator Robert Wagner, the sponsor of the law, a unanimous Senate Labor Committee intentionally eliminatedthe notice provision before the NLRA became law. “As the legislative history makes clear, Senator Wagner himself, together with his colleagues, thought there should be no requirement for companies to provide notification to employees. It is time for the NLRB to honor those wishes and abandon its ill-fated notice requirement,” said Cohen.

The amicus brief also discusses how Congress intentionally limited the NLRB’s jurisdiction to actual parties in pending cases—a limitation that was deemed by Congress to be central to the NLRA’s constitutionality. Finally, the amicus brief argues that the new NLRB-created notice obligation undermines important rights afforded by other statutes that explicitly provide for notice provisions. View a copy of the amicus brief at http://www.morganlewis.com/pubs/AmicusBriefUSHouseMembers_DC_15nov11.pdf. A decision regarding whether the NLRB had the authority to issue the Rule is expected before the current implementation date of January 31, 2012.

Copyright © 2011 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

In Ninth Circuit, Whistleblowers Not Exempt From Confidentiality Agreements

Posted in the National Law Review an article by attorney Anthony Navid Moshirnia of Sheppard, Mullin, Richter & Hampton LLP about blowing the whistle on alleged fraud against the Government does not entitle an employee to loot:

 

Blowing the whistle on alleged fraud against the Government does not entitle an employee to loot and disclose her employer’s records in violation of a confidentiality agreement – at least not in the Ninth Circuit. In an opinion handed down in March of this year, the Ninth Circuit refused to adopt a so-called “public policy exception to confidentiality agreements to protect [qui tam plaintiffs]” who misappropriate documents from their employers ostensibly to buttress claims brought under the federal False Claims Act (“FCA”). U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1061-62 (9th Cir. 2011). Though this opinion has been on the books since Spring, it remains relevant, and worth keeping an eye on, as it provides powerful ammunition against FCA plaintiffs that continue to tout the “public policy” exception as though it were unassailable.

After learning that her job at General Dynamics C4 Systems, Inc. (“General Dynamics”) was going to be terminated, but before leaving her employment, Mary Cafasso “copied almost eleven gigabytes of data from [her employer’s] computers in anticipation of bringing a qui tam action” under the FCA.  When it discovered what Ms. Cafasso had done, General Dynamics filed suit in Arizona state court, seeking return of its purloined documents through a temporary restraining order (“TRO”). Apparently to avoid complying with the TRO, which the state court granted, Ms. Cafasso filed “a conclusory six page complaint . . . alleg[ing] FCA violations and retaliation.” She then used the FCA action to persuade the Arizona court to vacate the TRO and stay General Dynamics’ lawsuit.

When Ms. Cafasso’s FCA complaint was unsealed, General Dynamics counterclaimed alleging, inter alia, breach of contract arising from Ms. Cafasso’s misappropriation of documents in violation of a confidentiality agreement. In opposition to General Dynamics’ motion for summary judgment, Ms. Cafasso argued that General Dynamics had failed to prove contract damages and that, even if it had, her conduct was permissible because “[p]ublic policy grants [a] Relator a privilege in gathering copies of documents as part of an investigation under the FCA and gives [a] Relator immunity from civil liability based on claims against her for so doing.” U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 2009 WL 1457036, *13 (D. Ariz. May 21, 2009).

The trial court dismissed both of Ms. Cafasso’s arguments. It found that damages were established by the stipulated damages clause in the General Dynamics confidentiality agreement. After reviewing the parties’ competing legal arguments, the trial court also found that “public policy does not immunize Cafasso, [who] confuses protecting whistleblowers from retaliation for lawfully reporting fraud with immunizing whistleblowers for wrongful acts made in the course of looking for evidence of fraud.” The court concluded that “[s]tatutory incentives encouraging investigation of possible fraud under the FCA do not establish a public policy in favor of violating an employer’s contractual confidentiality and nondisclosure rights.”

On appeal, Ms. Cafasso did not dispute that her actions violated her confidentiality agreement with General Dynamics, but nonetheless urged the Court to “adopt a public policy exception to enforcement of such contracts that would allow relators to disclose confidential information in furtherance of an FCA action.”  While noting that Ms. Cafasso’s position was not frivolous, and might apply “in particular instances for particular documents,” the Ninth Circuit found that Ms. Cafasso’s data removal was not privileged.

The Ninth Circuit appears to have relied on two factors to reach this conclusion: the scope and volume of the documents Ms. Cafasso took. With respect to scope, the Ninth Circuit faulted Ms. Cafasso’s “indiscriminate appropriation of documents,” referring to it as an “unselective taking [that included] attorney client privileged communications, trade secrets belonging to [General Dynamics] and other contractors, internal research and development information, sensitive government information, and at least one patent application that the Patent Office had placed under a secrecy order.”  The Court was also troubled by the fact that Ms. Cafasso had taken over 11 gigabytes of data, noting that “the need to facilitate valid claims does not justify the wholesale stripping of a company’s confidential documents.” In sum, the Ninth Circuit found that an “exception broad enough to protect the scope of Cafasso’s massive document gather in this case would make all confidentiality agreements unenforceable as long as the employee later files a qui tam action” – an unacceptable result.

While Cafasso stopped short of rejecting the public policy defense to data theft as a matter of law, it certainly provides a new avenue to FCA defendants attempting to prevent qui tam relators from benefitting from extrajudicial discovery.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

Are Restrictive Covenants Enforceable in California? It Depends.

Recently posted in the National Law Review an article by attorneys Alice Y. Chu and Kurt A. Kappes of Greenberg Traurig, LLP regarding the enforeceability of non-competes in California:

 

GT Law

 

In California, it is well established that non-compete provisions are unenforceable, subject to certain statutory exceptions. Nevertheless, some courts have also recognized that non-compete provisions are enforceable if necessary to protect confidential information or trade secrets.

But what about non-compete provisions that are ambiguous as to their protection of confidential information or trade secrets? Recently, when faced with such a provision, one California federal court narrowly construed the provision to find it enforceable.

The Facts in Richmond

In Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158 (N.D. Cal. July 1, 2011), a California federal district court evaluated the following provisions included in the parties’ Confidentiality and Non-Disclosure Agreement (“NDA”):1

Non–Solicitation. During the Term of this Employment (a[s] hereinafter defined), and for a period of one year thereafter, [defendant] [shall not] directly or indirectly, initiate any contact or communication with, solicit or attempt to solicit the employee of, or enter into any agreement with any employee, consultant, sales representative, or account manager of [plaintiff] unless such person has ceased its relationship with [plaintiff] for a period of not less than six months. Similarly [plaintiff] shall not solicit the employment of, or enter into any agreement with any employee, consultant or representative of [defendant].

Non–Interference. During the Term of this Employment, and for a period of one year thereafter, [defendant] will not initiate any contact or communication with, solicit or attempt to solicit, or enter into any agreement with, any account, acquiring bank, merchant, customer, client, or vendor of [plaintiff] in the products created and serviced by [plaintiff], unless (a) such person has ceased its relationship with [plaintiff] for a period of not less than six months, or (b) [defendant]’s relationship and association with such person both (i) pre-existed the date of this Agreement and (ii) does not directly or indirectly conflict with any of the current or reasonably anticipated future business of [plaintiff].

Non Compete and Non Circumvent. [Defendant] will not compete with [plaintiff] with similar product and or Service using its technology for a period of one year thereafter. [Defendant] will not use any of the [plaintiff]’s technical knowhow or Source Code for the personal benefit other than the employment and to meet the customer needs defined by [plaintiff].2

The NDA also contained a provision that barred the defendant from disclosing or using confidential information used in plaintiff’s business.3 Confidential information was defined to include “Proprietary Data,” such as “know-how,” contract terms and conditions with merchants, technical data, and source code; “Business and Financial Data;” “Marketing and Developing Operations;” and “Customers, Vendors, Contractors, and Employees,” including their names and identities, data provided by customers, and information on the products and services purchased by customers.4

The Richmond Court’s Analysis

In evaluating plaintiff’s motion for a temporary restraining order, the court assessed plaintiff’s claim that, by teaming up with plaintiff’s former employee to form a competing venture, the defendant had breached the non-compete provisions of the NDA.5 Defendants argued that the plaintiff was not likely to prevail on its contract claims because the non-compete provisions in the NDA are unenforceable under California Business and Professions Code § 16600.6

Within this context, the court first noted that the California Supreme Court had recently confirmed that “‘[t]oday in California, covenants not to compete are void, subject to several exceptions,” and that the California Supreme Court “‘generally condemns noncompetition agreements.’”7

Second, the court also observed that the California Supreme Court had rejected the “narrow-restraints” exception to Section 16600 applied in several Ninth Circuit cases, finding that “‘California courts have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.’”8 As the court stated, “Section 16600 stands as a broad prohibition on ‘every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.’”9

Third, the court rejected plaintiff’s argument that Section 16600 applies only to restrictions on employees, concluding that Section 16600 did apply to the facts of the case.10

Fourth, the court acknowledged that, even though Section 16600 applied, a number of California courts have also held that former employees may not misappropriate a former employer’s trade secrets to compete unfairly with the former employer.11

Applying these principles, the court held that the non-solicitation and non-interference provisions of the NDA were likely unenforceable under California law because the provisions were more broadly drafted than necessary to protect plaintiff’s trade secrets and “would have the effect of restraining Defendants from pursuing their chosen business and professions if enforced.”12

In regards to the non-compete provision, the court reasoned that “the scope of the prohibitions on ‘compet[ing] with [plaintiff] with similar product and or Service using its technology” and using ‘technical knowhow’ is not entirely clear.”13 However, the court then concluded that “if the clause is construed to bar only the use of confidential source code, software, or techniques developed for [plaintiff’s] products or clients, it is likely enforceable as necessary to protect [plaintiff]’s trade secrets.”14

To support this construction, the court specifically cited the California Uniform Trade Secrets Act (“UTSA”)’s definition of a “trade secret,” even though plaintiff had not alleged a UTSA claim against the defendants and the UTSA was not briefed.15 The court also found that the provision prohibiting use of confidential information was likely enforceable to the extent that the claimed confidential information is protectable as a trade secret.16

Based on these conclusions regarding the enforceability of the provisions, and facts showing that plaintiff had established at least serious questions going to the merits of its claims, the court issued a narrow temporary restraining order.17

IMPLICATIONS

Richmond demonstrates that at least one California federal court may be willing to narrowly construe an ambiguous non-compete provision and find it enforceable to the extent necessary to protect a party’s trade secrets. In so doing, however, the court invites comparisons to California cases where courts have refused to narrowly construe broad non-compete provisions to be protections of trade secrets.18 For example, in D’sa v. Playhut, Inc., 85 Cal. App. 4th 927 (2000), a Court of Appeals refused to reform a non-compete provision that broadly prohibited employees from working in connection with a competing product.19 But D’sa was strictly in the employment context, where courts are more likely to look for over-reaching. Arguably, moreover, the provision at issue in D’Sa was broader than the provision considered inRichmond, which expressly referenced “technology,” “technical knowhow,” and “Source Code” in its language. Nevertheless, even with these references, the Richmond court conceded that the scope of the provision was “not entirely clear,” yet was willing to reform it to find it enforceable.

Furthermore, in enforcing the non-compete provision, the Richmond court also relied on the so-called “trade secret exception” to Section 1660020 — an exception that the California Supreme Court noted but declined to address in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 946 n.4 (2008). This is an exception that other courts, particularly state courts, have questioned.21 This reliance suggests that, in the absence of conclusive guidance from the California Supreme Court on the viability of this exception, federal courts may remain willing to apply this exception to non-compete provisions perhaps as a way to harmonize the two statutes. In doing so, it is possible that the same collision between federal jurisprudence and state jurisprudence that gave rise to the Edwards decision may lie ahead. The California Supreme Court will then have an opportunity to address a key issue that the Supreme Court left unaddressed in a footnote in Edwards.

Finally, even with the uncertainty over the viability of the “trade secret exception” and whether courts will narrowly construe a non-compete provision to find it enforceable, companies should ensure non-compete provisions are drafted to clearly and specifically protect trade secrets, thereby increasing the likelihood that such a provision will be enforced.

1Plaintiff is a company that provides enterprise resource planning software for financial service companies that provide credit card terminals to merchants. Id. at *1. One of the defendants developed and maintained enterprise resource planning software for the plaintiff and, pursuant to this relationship, entered into this NDA with plaintiff’s predecessor-in-interest. Id. at *1-2.

2Id. at *16.
3Id. at *16.
4Id. at *16.
5Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158, at *15-22 (N.D. Cal. July 1, 2011).
6Id. at *16.
7Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158, at *16 (N.D. Cal. July 1, 2011)(quoting Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 945-46 (2008)).
8Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158, at *17 (N.D. Cal. July 1, 2011)(quoting Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 949 (2008)).
9Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158, at *17 (N.D. Cal. July 1, 2011)(quoting Cal. Bus. & Profs. Code § 16600).
10Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158, at *17 (N.D. Cal. July 1, 2011).
11Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158 at *18 (N.D. Cal. July 1, 2011)(quoting Retirement Group v. Galante, 176 Cal. App. 4th 1226, 1237 (2009)(citing Morlife Inc. v. Perry, 56 Cal. App. 4th 1514, 1519-20 (1997); American Credit Indemnity Co. v. Sacks, 213 Cal. App. 3d 622, 634 (1989); Southern Cal. Disinfecting Co. v. Lomkin, 183 Cal. App. 2d 431, 442–448 (1960); Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324, 1338 (9th Cir. 1980); Gordon v. Landau, 49 Cal. 2d 690 (1958); Gordon v. Schwartz, 147 Cal. App. 2d 213 (1956); Gordon v. Wasserman, 153 Cal. App. 2d 328 (1957)).
12Id. at *18.
13Id. at *19.
14Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158, at *19 (N.D. Cal. July 1, 2011)(citing Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1456 (2002)). Interestingly, there is theoretically no temporal limit to a trade secret, so the one year limit of the non-compete provision actually undercut the plaintiff’s protection!
15See Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158, at *19 (N.D. Cal. July 1, 2011)(citing Cal. Civ.Code § 3426.1(defining “trade secret” to include programs, methods, and techniques that derive independent economic value from not being generally known to the public, provided they are subject to reasonable efforts to maintain their secrecy)).
16Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158, at *19 (N.D. Cal. July 1, 2011)
17Id. at *23.
18Perhaps this decision also signals a willingness among California federal courts to protect employer’s interests by reforming or severing provisions that may not comply with Section 16600. See also Thomas Weisel Partners LLC v. BNP Paribas, No. C 07–6198 MHP, 2010 WL 1267744 (N.D. Cal. Feb. 10, 2010)(holding that a former employee’s non-solicitation provision was void to the extent it restricted the former employee’s ability to hire the employer’s employees after the former employee transitioned to another company, but upholding the rest of the employment agreement). These decisions may renew forum shopping, the ill that the California Supreme Court’s decision in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008) was implicitly designed to address.
19The provision stated: “Employee will not render services, directly or indirectly, for a period of one year after separation of employment with Playhut, Inc. to any person or entity in connection with any Competing Product. A ‘Competing Product’ shall mean any products, processes or services of any person or entity other than Playhut, Inc. in existence or under development, which are substantially the same, may be substituted for, or applied to substantially that same end use as the products, processes or services with which I work during the time of my employment with Playhut, Inc. or about which I work during the time of my employment with Playhut Inc. or about which I acquire Confidential Information through my work with Playhut, Inc. Employee agrees that, upon accepting employment with any organization in competition with the Company or its affiliates during a period of five year(s) following employment separation, Employee shall notify the Company in writing within thirty days of the name and address of such new employer.” D’sa v. Playhut, Inc., 85 Cal. App. 4th 927, 930 -31(2000).
20Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158 at *18 (N.D. Cal. July 1, 2011).
21As an example of the trend, see, e.g., Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 577 (2009)(“Although we doubt the continued viability of the common law trade secret exception to covenants not to compete, we need not resolve the issue here.”); Robinson v. U-Haul Co. of California, Nos. A124070, A124097, A124096, 2010 WL 4113578, at *10 (Cal. Ct. App. Oct. 20, 2010)(“the so-called ‘trade secrets’ exception to Business and Professions Code section 16600 . . .rests on shaky legal grounds”)(citing Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 946 n.4 (2008); Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 578 (2009);Retirement Group v. Galante, 176 Cal. App. 4th 1226, 1238 (2009)). When the apparent conflict in this area is addressed, perhaps the California Supreme Court will defuse it entirely, by agreeing with the way the court in Retirement Group v. Galante, 176 Cal. App. 4th 1226 (2009) reconciled it: “the conduct is enjoinable not because it falls within a judicially-created ‘exception’ to section 16600’s ban on contractual nonsolicitation clauses, but is instead enjoinable because it is wrongful independent of any contractual undertaking.” Retirement Group v. Galante, 176 Cal. App. 4th at 1238.

©2011 Greenberg Traurig, LLP. All rights reserved.

Physician Separation Issues

Posted in the National Law Review an article by attorney David Schick of Baker Hostetler physician Separation Agreements:

Physician Separation Issues are best dealt with upfront in the documents the physician enters into with the practice, when the physician joins the practice as an employee and/or when the physician becomes an owner of the practice.  Obtaining a Separation Agreement at the time a physician departs, while ideal, is often not possible, especially if the departure is not amicable; which is generally the case when the practice has terminated the physician’s employment.  The best way to avoid costly and time consuming litigation at the time of separation is to have carefully drafted documents prepared up front.  Think of these documents as a prenuptial agreement of sorts designed to govern post practice relationship issues, rather than post marital relationship issues.

For example, a well drafted Employment Agreement will specify the manner in which the physician’s employment may be terminated whether for cause (i.e. a specific set of reasons the practice may terminate the physician’s employment immediately); or for no cause (i.e. by the practice or by the physician voluntarily with a required period of notice).  This Agreement also will specify the parties’ rights and obligations to each other following termination.  These rights and/or obligations can vary depending upon whether the physician terminated his employment, whether the practice terminated the physician’s employment for cause, or whether the practice terminated the physician’s employment without cause.

For example, the practice usually will pay for the physician’s malpractice insurance during the physician’s employment.  However, the physician is usually responsible for the cost of “tail” coverage upon termination of employment, which can be very expensive. A common compromise, however, is for the physician to be responsible for the cost of “tail” coverage if the physician terminates his own employment (i.e. quits), or if the practice terminates the physician’s employment for cause (i.e. because the physician committed one of the wrongful acts specified in the Employment Agreement); however, the practice may be obligated to purchase the “tail” coverage if the practice terminates the physician’s employment without cause.

The well drafted Employment Agreement also will specify that all patients treated by the physician are the practice’s patients, not the physician’s patients; and upon termination, the patients’ medical records remain the property of the practice.  However, the Employment Agreement should grant the physician the right to make copies of such records for any legitimate (non-competitive) purpose including defense of a malpractice action or a third party audit at the physician’s expense.

These Employment Agreements also will specify the parties’ obligations to each other regarding the non-disclosure of confidential information, the non-solicitation of the practice’s patients and employees, and non-competition, both during employment and following termination.  The non-competition provisions will typically specify a certain geographic service area within (and a time period during which) the physician may not practice or establish an office.  These provisions are of particular importance to both the physician and the practice; and if not properly drafted can be rendered unenforceable.  A non-competition provision that turns out to be unenforceable will come as a pleasant surprise for the departing physician and as a bitter pill for the practice to swallow.  This area of the law is currently in a state of flux, and legal expertise is critical to draft critical to draft contractual language that stands the best chance of meeting the parties’ expectations during and following the parties’ relationship with each other.

Carefully drafted buy in and entity governing documents also are necessary to deal with the issues pertaining to the practice’s and the physician’s relationship with each other during the period of ownership, and upon termination of such ownership.  The physician owner’s Employment Agreement will not only deal with the issues described above, but also will deal with the payment of any earned, but unpaid compensation payable upon the physician’s termination of employment.  This earned, but unpaid compensation typically represents the physician’s share of the practice’s accounts receivables based on a formula set forth in the Employment Agreement.  The amount payable can sometimes vary depending upon whether the practice terminated the physician’s employment for cause or without cause; or whether the physician terminated his employment.

The buy-in documents (i.e. shareholder buy-sell, operating and/or partnership agreements) depending on the nature of the entity involved, also will deal with the amount of money, if any, the physician is entitled to be paid for the physician’s ownership interest in the practice.  These Agreements, if properly drafted, spell out how the value of such ownership interest will be determined, and the manner in which payment for such interest will be made (i.e. immediately, via insurance proceeds in the event of death, and/or via a promissory note over time).  Once again, the purchase price and/or the manner of payment can vary depending upon the reason for the separation and/or on whether the physician’s separation occurs close to (or coincidently with) another owner’s separation.  Simultaneous withdrawal provisions are critical to prevent the practice from having to pay out multiple physicians at the same time, when those physicians leave together or within a relatively short period of time of each other.  Otherwise, these “simultaneous” withdrawals can create a financial burden on the practice (or a “run on the bank”) that the practice may not be able to satisfy; a disappointing result for both the practice and the departing physician.

Similar documents govern the parties’ relationship with each other, during (and upon termination of) the parties’ relationship with each other, in connection with other business entities connected with the practice.  Typically, the practice owners also own interests in the building within which the practice is located; as well as other joint ventures or entities such as ambulatory surgical or imaging centers.  Properly draft shareholder buy-sell, operating and/or partnership agreements governing these ancillary entities, also will define the parties’ rights, duties and obligations to each other in the event the physician’s relationship with the practice is terminated, and will dictate whether the departing physician also is to be bought out or otherwise removed from these entities.

In summary, not all physician departures are amicable; and in fact, many are not.  Further, the practice might not even be dealing with the physician at the time of separation; which is the case in the event of a physician’s death.  Emotions typically run high at this juncture, and carefully drafted documents will give the parties’ the security of knowing what will be expected of them at the time of separation.  The time and expense spent up front also will be significantly less than the time and expense associated with the litigation that is almost certain to ensue in the absence of pre-existing definitive agreements that govern the separation.

© 2011 Baker & Hostetler LLP

2011 Wisconsin Act 49: Wisconsin Tax Law Amended to Conform with Federal Adult Child Coverage Requirements

Posted in the National Law Review an article by Alyssa D. Dowse and Timothy C. McDonald of von Briesen & Roper, S.C.  regarding Wisconsin’s state income tax law for health coverage provided to an employee’s adult child to the exclusion provided for that coverage under federal income tax law.

As expected, Governor Scott Walker has signed legislation to conform the exclusion under Wisconsin state income tax law for health coverage provided to an employee’s adult child to the exclusion provided for that coverage under federal income tax law. If an employer’s health plan extends coverage to an employee’s adult child, then, through the end of the tax year in which the child attains age 26, the employee will not be subject to either federal or Wisconsin state income tax on the value of that coverage. This is the case regardless of whether the child otherwise qualifies as the employee’s tax dependent. This change in Wisconsin law is effective for tax years beginning on or after January 1, 2011.

If employer health plan coverage is provided to an employee’s adult child after the tax year in which the child attains age 26, then, as under current law, the employee will be subject to federal and Wisconsin state income tax on the value of that coverage unless the child qualifies as the employee’s tax dependent for health plan purposes.

Governor Walker signed 2011 Wisconsin Act 49 (the “Act”), which amends Wisconsin tax law to conform the state income tax exclusion for coverage provided to an employee’s adult child to the federal income tax exclusion, on November 4, 2011.

©2011 von Briesen & Roper, s.c