A Non-Compete Law Roadmap for Tech Start-Ups in Key Jurisdictions

Posted in Employers, GT Alert, non-competition agreements, Start-up, Trade Secrets, Uncategorized

The enforceability of restrictive covenants, particularly non-compete agreements, can be very difficult for employers to navigate, especially for companies in their “start-up” phase. Technology companies in particular face challenges in structuring non-competes that balance their need to attract talent with their need to protect confidential and sensitive information, while preventing unfair competition by former employees. Many states have developed common law precedent as to what constitutes a permissible non-compete, while others have enacted statutes. Emerging technology companies must be aware of the laws in their jurisdictions in order to draft enforceable restrictive covenants that adequately protect business needs. The below chart presents a summary of employee non-competition laws and applicable standards in four states where emerging technology companies often do business: California, Massachusetts, New York, and Texas.

Topic CA MA NY TX
Statutes/ regulations governing non-competes Sections 16600 to 16607 of the California Business and Professions Code govern non-competes. Massachusetts Noncompetition Agreement, Act, M.G.L. c. 149, § 24L (effective for agreements made on or after Oct. 1, 2018). No statute or regulation governing non-competes generally. Texas Covenants Not to Compete Act, Tex Bus. & Com. Code Ann. §§ 15.50 to 15.52.
Essential Elements Post-employment non-compete agreements are unlawful except in the context of a sale of a business.

To be valid and enforceable, a non-compete agreement must:

-be in writing and signed by both the employer and employee;

-expressly state that the employee may consult with an attorney before signing;

-be provided, if made before employment begins, to the employee by the earlier of either: (a) formal offer of employment; or (b) at least 10 business days before employment begins;

-be supported, if made after employment begins but not in connection with termination of employment, by fair and reasonable consideration independent from continued employment; and provided to the employee at least 10 business before agreement is effective;

-be no broader than necessary to protect the following legitimate interests of the employer: (a) trade secrets; (b) confidential information that is not a trade secret; or (c) the employer’s goodwill.

New York common law disfavors non-compete agreements as an unreasonable restraint of trade.

Courts may enforce a non-compete if the restriction is reasonable. Although courts evaluate non-competes on a case-by-case basis, a non-compete can be enforced only if it:

-is no greater than required to protect an employer’s legitimate protectable interests;

-does not impose undue hardship on the employee;

-does not cause injury to the public;

-is reasonable in: duration; and geographic scope

New York courts have recognized the following protectable interests that may be sufficient to support a reasonable non-compete:

-employer’s trade secrets or confidential information;

-employer’s goodwill;

-employer’s interest in preventing loss to a competitor of an employee whose services are special, unique, or extraordinary.

To be enforceable under Texas law, a non-compete must:

-be ancillary to or part of an otherwise enforceable agreement when the agreement is made;

-be reasonable concerning time, geographical area, and scope of activity to be restrained;

-impose no greater restraint than necessary to protect the employer’s (or promisee’s) goodwill or other business interest.

 

Burden of Proof Plaintiff-former employer bears the burden of proving that a statutory exception applies to the general rule prohibiting non-compete agreements. Employer has the burden of proof to enforce a non-compete.

Party seeking enforcement of the non-compete (typically, the employer) has the burden of proof.

 

If primary purpose of the ancillary agreement is to obligate the employee to provide personal services, the employer has the burden of proof to show that the covenant is reasonable.
Circumstances of Departure Relevant Does not matter whether employer or employee terminates the relationship. Post-employment non-competes are unenforceable in California unless a narrow exception applies.

Employers may not enforce non-compete agreements entered into on or after Oct. 1, 2018, against employees who have been:

-terminated without cause;

-laid off.

 

While NY courts are not entirely in agreement regarding whether non-compete agreements are enforceable against employees who have been terminated by the employer without cause, an increasing number of cases seem to find that they are not enforceable under those circumstances.

If the termination constitutes a breach of contract by an employer, any post-employment non-compete in that agreement cannot be enforced by the breaching employer.

Unless non-compete says otherwise, whether employee terminated or voluntarily departed is not-relevant.
Consideration Not applicable, as non-competes are not enforceable in California and are void against public policy, unless narrow exception applies.

Massachusetts courts have determined that the employment relationship itself is sufficient consideration for a non-compete agreement signed at the beginning of the employment relationship.

For agreements signed after hire, continued employment is not sufficient consideration as required under the Massachusetts Noncompetition Agreement Act.

Initial employment, and under certain circumstances, continued employment, suffices.

Payments to the employee.

Intangibles, including the employee’s receipt of increased:

-knowledge;

-skill; or

-professional status.

To be considered sufficient in Texas, consideration must give rise to the employer’s interest in restraining the employee from competing, and the covenant must be designed to enforce the employer’s consideration or return promise.
Time Range Not applicable, as non-competes are not enforceable in California and are void against public policy, unless narrow exception applies.

Massachusetts Noncompetition Agreement Act prohibits a restricted period of longer than one year from the date the employment ends. A restricted period may extend to a maximum of two years only if the employee:

-breached her fiduciary duty to the employer; or

-has unlawfully taken the employer’s property, either physically or electronically.

Courts have repeatedly held that six months or less is reasonable.

Courts have found longer restrictions to be either reasonable or unreasonable depending on facts of particular case.

 

Time restrictions ranging from two to five years have repeatedly been enforced in non-competes.
Geographic Restrictions (or other scope of enforcement) Not applicable, as non-competes are not enforceable in California and are void against public policy, unless narrow exception applies.

Under the Massachusetts Noncompetition Agreement Act, a geographic restriction is presumed reasonable when the reach is limited to regions where, for the last two years of employment, the employee:

-provided services;

-had a material presence of influence.

When determining whether a non-compete is reasonable in its geographic reach, New York courts focus on the facts and circumstances of each case.

Limitations based on the former employee’s territory during employment are valid.

Another approach, applicable in some circumstances, is to limit the geographic restriction to the area of the employer’s operations.

Click here to read the full GT Alert, “A Non-Compete Law Roadmap for Tech Start-Ups in Key Jurisdictions.”

IRS Clarifies U.S. Tax Treatment of Cross-Border Cloud and Other Online Transactions in Proposed Regulations

Posted in Cloud Computing, GT Alert

On Aug. 9, 2019, the IRS issued proposed regulations (Proposed Regulations) addressing the U.S. federal income tax treatment of cross-border cloud transactions. The Proposed Regulations will not become effective until final rules are adopted.

By way of background, the last time the IRS meaningfully addressed the taxation of cross-border digital content transfers was in October 1998 (1998 Regulations), which applied to software transfers.

Technological developments over the last twenty years – specifically the advent of cloud computing and streaming content – rendered the 1998 Regulations outdated. The IRS stated that the purpose of the Proposed Regulations is to bring IRS regulations current with such technological advancements.

The Proposed Regulations cover, for the first time, transactions involving:

  • Certain on-demand network-access transactions (Cloud Transactions) that include:
    • On-demand network access to “computing resources” such as software, networks, databases, servers, and other technological resources. Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) transactions fall into this category;
    • On-demand network access to “technological resources” such as streaming music and videos, transactions involving mobile development applications (apps), and access to data through remotely hosted software; and
  • The transfer of other digital content (Digital Content Transfers). The transfer of books, movies, and music in digital format for storage and use on a person’s computer or other electronic device falls into this category.

Click here for the full GT Alert.

Cryptocurrencies and Unclaimed Property: Potential Implications of State Escheat Laws for the Blockchain Technology Industry

Posted in cryptocurrency, Cybersecurity, Data Protection, GT Alert, Privacy and Data Security

This GT Advisory considers the application of state unclaimed property laws to cryptocurrencies, and the potential implications and challenges of such application for both industry participants and state unclaimed property administrators.

The use of blockchain technology and the issuance of cryptocurrencies have grown considerably in recent years, inviting heightened scrutiny and regulation. While federal securities, tax, and other financial services regulatory agencies, such as the SEC, the IRS, state securities commissioners and others, have begun applying their rules and regulations to cryptocurrency businesses, the cryptocurrency industry has not yet faced significant enforcement from state unclaimed property administrators.

To read the full GT Alert, click here.

Forget About Fake News, How About Fake People? California Starts Regulating Bots as of July 1, 2019

Posted in Artificial Intelligence, GT Alert, Technology

California SB 1001, Cal. Bus. & Prof. Code § 17940, et seq., takes effect July 1, 2019. The law regulates the online use of “bots” – computer programs that interact with a human being and give the appearance of being an actual person – by requiring disclosure when bots are being used.

The law applies in limited cases of online communications to (a) sell commercial goods or services, or (b) influence a vote in an election. Specifically, the law prohibits using a bot in those circumstances, “with the intent to mislead the other person about its artificial identity for the purpose of knowingly deceiving the person about the content of the communication in order to incentivize a purchase or sale of goods or services in a commercial transaction or to influence a vote in an election.” Disclosure of the existence of the bot avoids liability.

Click here to read the full GT Alert.

Florida Creates Blockchain Task Force to Study Benefits of Blockchain Technology

Posted in Blockchain Technology Task Force, Data Protection, GT Alert, Technology

On May 23, 2019, Florida Gov. Ron DeSantis signed SB 1024 (Florida Blockchain Bill) into law to establish the Florida Blockchain Task Force (Blockchain Task Force) within the Florida Department of Financial Services. The Blockchain Task Force will study if and how Florida’s state, county, and municipal governments can benefit from a transition to blockchain-based systems for recordkeeping, data security, financial transactions, and service delivery, and identify ways blockchain technology can be used to improve government interaction with businesses and the public.

The Florida legislation recognizes that blockchain and distributed ledger technology allow the secure recording of transactions and that blockchain can facilitate more efficient government service delivery, including facilitating safe paperless transactions and recordkeeping protected from cyberattacks and data destruction. With the passing of the Florida Blockchain Bill, Florida has joined a growing list of states – including New York, New Jersey, Illinois and Wyoming — that have formed task forces to study the potential benefits of blockchain.

To read the full GT Alert, click here.

*Special thanks to Alexander M. Capelli˘ for his assistance with this Alert.
˘Not admitted to practice law.

Demystifying Legal Diligence in Tech Deals

Posted in Entrepreneurship, Intellectual Property, investments, Patent, Patent Strategy, Start-up, Technology, Trade Secrets

Greenberg Traurig Shareholder Todd Basile authored an article titled “Demystifying Legal Diligence in Tech Deals,” published June 3, 2019, on IPWatchdog.com.

Click here to read the article.

Retail Innovation Booming in Israel

Posted in Retail, Venture Capital

Retail innovation is booming in Israel and corporate executives best take notice, as reported in a recent Forbes article. Hardly the first time Forbes has taken notice, this most recent article was inspired by a major retailer CEO’s visit to Israel. The article lists the staggering numbers boasted by Israel’s impressive retail technology start-up scene and advises, “if you are a retail executive, and you have yet to visit to Israel, it is time to book your ticket.”

Greenberg Traurig is the only major international law firm with a multidisciplinary, registered office in Tel Aviv and serves as a gateway for Israeli businesses and entrepreneurs seeking opportunities around the world, as well as for companies exploring opportunities within Israel. Our Emerging Technology Practice offers clients the global reach of Greenberg Traurig’s international network, connecting Israel’s booming technology scene to major commercial retail investors across the globe.

For more on emerging tech in Israel, click here.

New USPTO Guidance May Clear Path for More Technology Patents

Posted in Patent, Software Patents, Technology, USPTO

On January 4, 2019, the United States Patent and Trademark Office (USPTO) released new Patent Examiner Guidance (Guidance) for subject matter eligibility. The updated guidance could benefit any technology patent applicant who has a computer-related invention — from smartphones to artificial intelligence — and who has previously had difficulty acquiring patents under the USPTOʼs procedures for determining patent subject matter eligibility.

The Guidance is intended to provide some much-needed direction for technology patent applicants on how to formulate and prepare their patent applications to avoid potential subject matter eligibility issues. In addition, to the extent subject matter eligibility is raised by an examiner during the review process, the Guidance is intended to now allow patent applicants clearer understanding, and provides a pathway for responding to subject matter eligibility rejections under 35 U.S.C. § 101, particularly for those in the software sector. 

To learn more about the Guidance’s impact on technology innovators, read the TechCrunch Extra Crunch article, “New USPTO Guidance May Clear Path for More Technology Patents,” co-authored by James J. DeCarlo and Chinh H. Pham.

Greenberg Traurig’s Chinh Pham featured in TechCrunch Article: ‘Verified Expert Lawyer: Chinh Pham’

Posted in Intellectual Property, Small Businesses, Start-up, Technology

Chinh Pham, co-chair of Greenberg Traurig’s Emerging Technology Practice, was featured in a TechCrunch article as part of a series covering start-up lawyers who founders love to work with. In this piece, Chinh shares his insights about start-ups and discusses his beginnings in the legal profession. To read the article, click here.

Blockchain & Cryptocurrency Newsletter – Winter 2019

Posted in Blockchain Technology Task Force, cryptocurrency, Cybersecurity, Data Protection, Entrepreneurship, FAA, Privacy and Data Security, Tax, Technology

2018 was a year of transformation for the blockchain industry. While the market continued to see technological advancements in smart contracts, platform functionality, scalability and security, regulators took a firmer rein in pursuing those seeking to exploit the uninitiated or those engaged in outright fraud. In this issue of Greenberg Traurig’s Blockchain & Cryptocurrency Newsletter, we discuss some of the key enforcement actions and proceedings during 2018 that have shaped the regulatory environment in the United States and the continuing uncertainty over the classification of digital assets as securities.

In this issue:

1 – Disrupting the Disruptors: 2018 – The Year in Review

2 – Noteworthy Federal Securities Cases During 2018

  • Securities and Exchange Commission v. Blockvest, LLC et al.: SEC’s Request for Preliminary Injunction Denied
  • In the Matter of TokenLot, LLC et al.: SEC Order Against Unregistered Broker-Dealer
  • In the Matter of Crypto Asset Management, LP: SEC Order Against Unregistered Hedge Fund
  • In re Tomahawk Exploration: SEC Deems Token Airdrop as Sale of Securities

3 – 2018 State Regulatory Overview

  • NASAA’s Operation Cryptosweep
  • Initial Coin Offering (ICO) Enforcement Actions by States

4 – Traps for the Unwary: Federal Income Tax

5 – FinCEN Update

Click here to read the full GT Newsletter.

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