Current Trends & Practical Tips for Dealing With Employee Mobility Issues

Current Trends & Practical Tips for Dealing With Employee Mobility Issues Presented by: Michael Sheehan, Partner, DLA Piper Tim Brennan, Associate, DL...
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Current Trends & Practical Tips for Dealing With Employee Mobility Issues Presented by: Michael Sheehan, Partner, DLA Piper Tim Brennan, Associate, DLA Piper

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• Drafting Restrictive Covenants For Employees and Sale of Business • Utilizing Forfeiture and Clawback Provisions in Deferred Compensation Plans • Protecting Your Trade Secrets/Avoiding Liability For Taking Your Competitors • Litigation Tips & Practical Strategies

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Enforceable if there is any legitimate purpose Limitation on enforcement or additional requirements, e.g. receipt of confidential information or consideration beyond mere employment, limitations on blue penciling Simply unenforceable

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General Rules A restrictive covenant must be reasonable in scope: – Time • 1-2 years in the employment context • Sale of a business 5-10 years – Geography • An activity restraint, such as non-solicitation of customers can satisfy – Activity Restrained Must Serve A Legitimate Purpose • To preserve confidential information • To protect customer relationships • To preserve good will

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States with non-compete statutes

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States Where Non-Solicits Treated Like Non-Competes WA MT

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States with non-compete statutes States that do NOT apply their statue to non-solicitation of employees Undecided

States Where Non-Solicits Treated Like Non-Competes WA MT

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States with non-compete statutes States that do NOT apply their statue to non-solicitation of employees Undecided

States Where Non-Solicits Treated Like Non-Competes Golder Associates, Inc. v. Edge Environmental, Inc., 2007 WL 987458 (D. Colo. 2007) (finding that Colo. Rev. Stat. sec. WA 8-2-113, which provides that “any covenant not to compete which restricts the right of any person to receive MT ME ND compensation for performance of skilled or unskilled labor or for any employer shall be void” applies to provisions VT regarding OR non-solicitation of employees because it has the MN effect of preventing individuals from working together and NH thus is a restraint of trade). WI ID MA NY

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Share Corp. v. Momar Inc., 2010 WL 933897 (E.D. Wisc.) (sec. 103.465 applies to employee non-solicitation CT clauses; PA IA NE finding provision it applied an unreasonable restraint on trade and NJ is not reasonably NV invalid under the statute because OH IN DE necessary to protect theUT employer). IL WV

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Cox v. Altus Healthcare and Hospice, Inc., 308 Ga.App. 28 (Ct. App. 2011) non-solicitation provisions that NC bar even unsolicited contact with former employees is overbroad and unenforceable because it restricts employees’ TN activities more than isAZ necessary for the protection OK of the employer in violation of Georgia Constitutional AR NM SC Amendment). MS

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Whelan Sec. Co. v. Kennebrew, 379 S.W.3d 835 (Mo. 2012) (finding employee non-soliciation provision per se TX reasonable under Missouri Statute, sec. 431.202.2 because it LA contained only a one year time limit). FL

Warner and Co. v. Solberg, 634 N.W.2d 65 (N.D. 2001) (finding employee non-solicitation provision valid under NDCC, 9-08-06 where it was narrowly drawn, and thus not an illegal restraint of trade under the statute). AK

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Comm. Tech. Systems, Inc. v. Densmore, 583 N.W.2d 125 (S.D. 1998) (holding that employee non-solicitation agreement was void under SDCL 53-9-8 because it unlawfully restrains trade as it prevents the new employer from finding considering all suitable employees for its business). States with non-compete statutes States that do NOT apply their statue to non-solicitation of employees Undecided

States Where Non-Solicits NOT Treated Like Non-Competes WA MT

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States with non-compete statutes States that do NOT apply their statue to non-solicitation of employees Undecided

States Where Non-Solicits NOT Treated Like Non-Competes WA MT

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PA IA Nova Consulting Group v. Engineering Consulting Services, 2005 WL 2708811 (W.D. Tx. 2005) (holding NE NV OH employee non-solicitation agreements do not fall within Tex. Bus. Code. 15.50 because they do not bar IN DE IL UT competition and are not restraints onCO trade or commerce because they do not prohibit from working WV employees MD CA VA KS MO or being a competitor of former employers). KY NC

Oregon Rev. Stat. 653.295(4)(b): (4) subsections (1) and (2) of this section TN – (making noncompetition agreements OK AZ AR SC a covenant not to solicit void as a matter of law, unless theyNM fall within statutory exception) – do not apply to: (b) employees of the employer. GA MS

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Smith, Barney, Harris Upham & Co., Inc. v. Robinson, TX 12 F.3d 515 (5th Cir. 1994)(finding that agreement not to LA solicit employees of former employer was not within Louisiana statute prohibiting unreasonable restraints of trade because it does not restrain the lawful exercise of a profession, trade or business FL because it prevents only a specific group of employees from being recruited); CDI Corp. v. Hough, 9 So.3d 282 (C.A.5 2009)(affirming). AK

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States with non-compete statutes States that do NOT apply their statue to non-solicitation of employees Undecided

Customer Solicitation Covenants Are Completely Barred In California, But Employee Solicitation Covenants Live On – For Now

Customer Solicitation Covenants Are Completely Barred In California, But Employee Solicitation Covenants Live On – For Now

In Edwards v. Arthur Anderson LLP, 44 Cal. 4th 937 (2008), the California Supreme Court ruled that the customer solicitation restrictions at issue were invalid and unenforceable under §16600. The Court left open the prospect that customer solicitation necessary to protect trades secrets could be viable.

Customer Solicitation Covenants Are Completely Barred In California, But Employee Solicitation Covenants Live On – For Now

In Edwards v. Arthur Anderson LLP, 44 Cal. 4th 937 (2008), the th 1226 (4th Dist. 2009), the In The Retirement Group v. Galante, 176 ruled Cal. App. California Supreme Court that4 the customer solicitation court enforced part of a TRO which prohibited the defendants disclosing restrictions at issue were invalid and unenforceablefrom under §16600. plaintiff’s trade secret client information, but vacated a separate part of the The Court left open the prospect that customer solicitation necessary TRO which had prohibited thesecrets solicitation of viable. customers. The court essentially to protect trades could be held that the trade secret exception does not survive Edwards. See also Dowell v. Pacesetter Inc., 179 Cal. App. 4th 564, 577-58 (2d Dist. 2009)(refusing to enforce customer solicitation restriction because it was not narrowly tailored to protect trade secrets).

Customer Solicitation Covenants Are Completely Barred In California, But Employee Solicitation Covenants Live On – For Now

In Edwards v. Arthur Anderson LLP, 44 Cal. 4th 937 (2008), the th Dist. 2009), the The of Retirement Group v.an Galante, 176 or Cal. App. 4ththe 1226customer (4from California Supreme Court ruled thatemployee solicitation “[One]Intype provision restricts employee former soliciting the court enforced part of a TRO which prohibited the defendants from disclosing restrictions i.e., at issue were invalid unenforceable §16600. employer’s other employees, approaching them and for the purpose of under encouraging plaintiff’s trade secret client information, but vacated a separate part of the The Court left open the that customer solicitation necessary them to leave their present employer for prospect a competitor. Under California precedent, TRO which prohibited thesecrets solicitation of customers. The the court essentially to protect trades could viable. restrictions on the had solicitation of employees are notbe necessarily treated same way as held that the trade secret exception does not survive Edwards. See also Dowell restrictions on the solicitation of customers.th . . . The agreement in the instant action v. Pacesetter Inc., 179language Cal. App. (2d .Dist. 2009)(refusing to contains both ‘no solicitation’ and4 ‘no564, hire’577-58 language. . [T]he ‘no solicitation’ enforce customer solicitation language . . . does not violate sectionrestriction 16600. . . “because it was not narrowly tailored to protect trade secrets). Thomas Wiesel Partners LLC v. BNP Paribas, 2010 WL 546497 (N.D. Cal. Feb. 10, 2010)

Temporal Limits on Non-Competes In Employment Agreements WA MT

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Unenforceable 1-year maximum 2-year maximum

3-year maximum 5-year maximum

Is Continued Employment Sufficient Consideration? WA MT

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Not decided

N/A -- unenforceable

Yes

No, continued employment alone is NOT sufficient

Yes, but…

Is Continued Employment Sufficient Consideration? WA MTInc., 2013 ILND MElacked Fifield v. Premier Dealer Services, App (1st) 120327 (2013) (noncompetition covenant VT though he consideration two years after covenant signed, even ORbecause the employee’s job did not last MN NH had received a new jobIDin exchange for the covenant, and even WI though he was the one who quit). MA NY

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Flying Colors of Nashville, Inc. v. Keyt, 1991 WL 153198, at *4 (Tenn. Ct. App. Aug. PA 14, 1991) (finding 6 CT IA NJ NE months of employment to be sufficient consideration; “the consideration will generally be deemed NV OH IN DE reasonable if employmentUTcontinued for an ‘appreciable amountILof time’ after the employee signed the WV CO MD CA containing the covenant). agreement" VA KS MO KY

NC Compare Optos, Inc. v. Topcon Med. Sys., Inc., 777 F. Supp. 2d 217, 231TN(D. Mass. 2011) (concluding that OK AZ “Massachusetts has recognized the ARemployment alone may NM doctrine that continued SC suffice to support non-competition or other restrictive covenants”), with Metropolitan Removal Co. v. D.S.I. Removal GA AL (holding Specialists, Inc., 2006 WL 619111, at *1–2 (Mass. Super. Ct. Feb.MS 2, 2006) that noncompetition and non-solicitation agreements executed during continued at-will employment, without additional TX LA consideration were not valid); Cypress Grp., Inc. v. Stride & Assocs., Inc., No. 036070-BLS2, 2004 WL FL 616302, at *3 (Mass. Super. Ct. Feb. 11, 2004) (“Any time a restrictive covenant is signed by an employee, the employer must provide some clear additional benefit.”) AK

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Not decided

N/A -- unenforceable

Yes

No, continued employment alone is NOT sufficient

Yes, but…

What Happens When Employment Is Modified? WA MT

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Not decided

N/A -- unenforceable

Yes

No, continued employment alone is NOT sufficient

Yes, but…

What Happens When Employment Is Modified? WA MT

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NY SD Massachusetts: Each time an employee’s relationship with the employer changes RI MI WY materially such that they have entered into aIAnew employment relationship, a new CT PA NJ NE NV restrictive covenant must be signed-- Lycos, Inc. v. Jackson, 18 Mass.L.Rptr. 256 (Supr. OH IN DE IL UT Ct. 2004); Grace Hunt IT Solutions, LLC v. SIS Software, LLC, 29 Mass.L.Rptr. 460, (Supr. WV CO MD CA VA KS MO KY Ct. 2012); Protégé Software Services, Inc. v. Colameta, 30 Mass.L.Rptr. 127 (Supr. Ct. NC 2012). TN AZ

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Rhode Island: “Far reaching changes in an employment agreement…strongly suggest GA AL MS that the parties have abandoned their old arrangement and have entered into a new TX LA relationship” Marso v. Bradford Soap Int’l, Inc., 2010 WL 2639757 (R.I. Super. Ct. June FL 25, 2010). AK

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Not decided

N/A -- unenforceable

Yes

No, continued employment alone is NOT sufficient

Yes, but…

What Happens When Employment Is Modified? WA MT

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Best Practice:

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IN 1. Covenants executed after the commencement of IL UT CO employment should be done in conjunction with KS MO KY annual pay increases or bonus AZ

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2. Employees should re-execute covenants upon AL MS significant changes in job responsibility TX

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Not decided

N/A -- unenforceable

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Split of Authority re Meaning of “Solicit” WA MT

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No solicitation without initial contact/ further restraint violates public policy Solicitation can occur without initial contact Solicitation requires initial contact, but can restrict further by contract

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Split of Authority re Meaning of “Solicit” Bessemer Trust Co., N.A. v. Branin, 16 N.Y.3d 549, 559-560 (2011)(“a seller may not contact his former clients directly, he may, ‘in response to inquiries’ made on a former client's own initiative, answer factual questions”). WA

Gateway Systems, Inc. v. Chesapeake Systems Solutions, 2010 U.S. Dist. LEXIS 95470 (N.D. Ill. Sept. 14, MT ME 2010)(“solicitation does not hinge on who contactsND whom. . . . [C]ourts applying Illinois law have defined solicitation VT OR direct contact that the recipient would understand to encompass any as a solicitation for business”). MN ID

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American Family Mutual Insurance WY Company v. Hollander, 2009 U.S.Dist.LEXIS 16897 (D. Iowa March 3, RI MI 2009)(applying Wisconsin law; where restrictive covenant prohibited ex-employee fromPAsoliciting or CT inducing IA NJ NE the term induce was broader than solicitation and prohibited customers to cancelNV policies, the court recognized that OH IN of who initiates contact). DE any activity that would influence IL UT the customer to cancel his/her policy regardless CA

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International Security Management Group, Inc. v. Sawyer, 2006 U.S. Dist. 37059 (M.D. Tenn. June 6, NC 2006)(former manager violated his employee piracy restriction by interviewing his former employees who initiated TN OK employer; the strong relationships he developed with contact in response to a newspaper ad placed by his new AZ AR NM SC those individuals at his prior employer provided an unfair competitive advantage in the recruiting process). MS

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Getman v. USI Holdings Corp., 19 Mass. L. Rep. 679, 2005 Mass. Super. LEXIS 407, *12 (2005)(recognizing that TX statements which “praise” a new employer, “deprecate” a former LA employer, or “otherwise encourage” someone to choose the new employer are forms of inducement). FL

Scarbrough v. Liberty Nat’l Life Ins., 872 So. 2d 283, 285 (Fla. App. 2004)(“even if the former client had initiated contact ... a solicitationAKcould nonethelessHIoccur if, [he] made a comparison for the client between the benefits and No solicitation without initial contact/ further premiums afforded by the two insurance companies”). restraint violates public policy Solicitation can occur without initial contact Solicitation requires initial contact, but can restrict further by contract

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Split of Authority re Meaning of “Solicit” Fine v. Communication Trends, 305 Ga.App. 298 (Ct. App. GA 2010) (finding that a covenant WA prohibiting ex-employee from MT accepting business from former customers who initiated contact with ME ND her was overbroad and unenforceable under Georgia law). VT OR MN

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SD Thomas Wiesel Partners LLC v. BNP Paribas, 2010 WL 546497 (N.D. Cal. Feb. 10,NY2010) (predicting RI MI WY that Cal.Bus.& Prof. Code 16600 would still permit an agreement not to solicit employees, but a “noCT PA IA NJ NE hire” is an unlawful NV restraint of trade). OH UT

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VA July MD Slicex, Inc.CAv. Aeroflex Colorado Springs, Inc., KS 2006 U.S.Dist.LEXIS 51000 (D. Utah 25, 2006) (a MO KY restrictive covenant that prohibits solicitation of employees requires affirmative action by the NC TN defendant, and whereAZthe employee initiates contact, no violation occurs. Court further recognized OK AR SC that a complete hiring ban wouldNM likely violate public policy and be unenforceable). MS

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Atmel Corporation v. Vitesse Semiconductor Corporation, 30 P.3d 789 (Colo. Ct. App. 2001) (a TX restrictive covenant prohibiting solicitation of employees LA only prohibits initiating contact with former coworkers and does not prohibit actively participating in the interviewFL process; a broader interpretation would be void against public policy). AK

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No solicitation without initial contact/ further restraint violates public policy Solicitation can occur without initial contact Solicitation requires initial contact, but can restrict further by contract

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Split of Authority re Meaning of “Solicit” WA MT

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Farm Bureau Mutual Insurance Company v. Osby, 2005 Iowa App. LEXIS 1342 (Iowa App. NH WI ID MA NY SD prohibited defendant from soliciting, Ct. 2005)(where restrictive covenant only but failed RI MI WY to either define solicitation or prohibit selling toIAplaintiff’s customers, PA it was not breach CT NJ NE NV defendant to sell insurance of contract for to customersIN whoOH initiated contact with DE IL UT defendant). WV CO MD MN

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NC App. LEXIS 83, Mona Electric Group, Inc. v. Truland Service, 56 Fed. Appx. TN 108, 2003 U.S. OK AZ (4th Cir. 2003)(applying Maryland law, “the plain requires the AR meaning of ‘solicit’ NM SC initiation of contact. . . . If Mona intended to prevent Gerardi from conducting business GA AL MS with its customers it could have easily stated that in the Agreement”). TX

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No solicitation without initial contact/ further restraint violates public policy Solicitation can occur without initial contact Solicitation requires initial contact, but can restrict further by contract

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Draft Around The Problem a. I agree that during my employment with the Company and for a period of two (2) years after the termination of my employment from the Company, I will not: (i)

directly or indirectly contact or solicit any of the Company’s customers or end users, or prospective customers or end users;

(ii)

with whom I had direct or indirect contact or solicited on behalf of the Company in the two (2) years prior to my termination;

(iii)

for the purpose of selling or soliciting products or services that are in competition with the products or services of the Company.

b. I agree that during my employment with the Company, and for a period of two (2) years thereafter, I will not directly or indirectly contact or solicit any employees of the Company with whom I worked or had contact for the purpose of causing, inviting, or encouraging any such employee to alter or terminate his or her employment or business relationship with the Company.

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Draft Around The Problem a. I agree that during my employment with the Company and for a period of two (2) years after the termination of my employment from the Company, I will not:

or accept business from

(i)

directly or indirectly contact or solicit any of the Company’s customers or end users, or prospective customers or end users;

(ii)

with whom I had direct or indirect contact or solicited on behalf of the Company in the two (2) years prior to my termination;

(iii)

for the purpose of selling or soliciting products or services that are in competition with the products or services of the Company.

or hire

b. I agree that during my employment with the Company, and for a period of two (2) years thereafter, I will not directly or indirectly contact or solicit any employees of the Company with whom I worked or had contact for the purpose of causing, inviting, or encouraging any such employee to alter or terminate his or her employment or business relationship with the Company.

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Draft Around The Problem a. I agree that during my employment with the Company and for a period of two (2) years after the termination of my employment from the Company, I will not:

or accept business from

(i)

directly or indirectly contact or solicit any of the Company’s customers or end users, or prospective customers or end users;

(ii)

with whom I had direct or indirect contact or solicited on behalf of the Company in the two (2) years prior to my termination;

(iii)

for the purpose of selling or soliciting products or services that are in competition with the products or services of the Company.

or hire

b. I agree that during my employment with the Company, and for a period of two (2) years thereafter, I will not directly or indirectly contact or solicit any employees of the Company with whom I worked or had contact for the purpose of causing, inviting, or encouraging any such employee to alter or terminate his or her employment or business relationship with the Company. c.

For purposes of this section, solicitation means: (i)

Any comments, conduct or activity that would influence a customer’s decision to continue doing business with company, regardless of who initiates contact.

(ii) Any comments, conduct or activity that would influence an employee’s decision to resign his employment with Company or accept employment with Employee’s new company, regardless of who initiates contact.

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Blue Penciling Allowed? WA MT

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Allowed

Unclear

Not Allowed

Allowed But With Restrictions Only In Connection With The Sale Of A Business

Blue Penciling Allowed? WA MT

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CBD Docusource, Inc. v. Franks, 934 So. 2d 307 (La. Ct. App. 5th Cir. 2006)(courts can only VT reform OR MN overbroad restrictions where the relevant contract contains a severability clause). NH ID

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WY Deutsche Post Global Mail, Ltd. V. Conrad, 292 F.Supp.2d 748, 758 (D.Md. 2003)(“blue pencilingCT must be PA IA NJ in an limited to the removal of offending language and NE cannot include the addition of words or phrases NV OH IN DE IL effort to make the restrictive UT covenant reasonable”). WV

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Technology Partners, Inc. v. Hart, 298 Fed. Appx. 238, 243 (applying NC law; court may only revise an NC TN of the covenant in order to unenforceable covenant and may not enforce a distinctly separable part OK AZ AR SC render the provision reasonable). NM MS

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Tex. Bus. & Com. Code §15.51(c) & Deaton v. United Mobile Networks, L.P., 926 S.W.2d 756, 762 (Tex. TX Ct. App.—Texarkana 1996)(reformation is available only prospectively for injunctive relief). LA FL

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Allowed

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Not Allowed

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Blue Penciling Allowed? WA MT

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Allowed

Unclear

Not Allowed

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Only In Connection With The Sale Of A Business

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Beware of Choice of Law Limitations WA MT

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Generally enforceable with some relationship to State Follow the Restatement; enforceable if there are contacts with the State, and the contract doesn’t offend public policy Generally will not enforce choice of law provision

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“No Poach” Agreements

“No Poach” Agreements

“No Poach” Agreements

“No Poach” Agreements

“No Poach” Agreements

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“No Poach” Agreements

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“No Poach” Agreements

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• Drafting Restrictive Covenants For Employees and Sale of Business • Utilizing Forfeiture and Clawback Provisions in Deferred Compensation Plans • Protecting Your Trade Secrets/Avoiding Liability For Taking Your Competitors • Litigation Tips & Practical Strategies

©

Embedding Restrictive Covenants Into Deferred Compensation Plans

Severance Plan Stock Option Plan

ERISA 409A Plan

“I agree that if I violate the restrictive covenant provisions of this Agreement, I forfeit my (Options; Severance; Deferred Compensation)” ©

Pros & Cons: Covenants In Non-ERISA Plans Are Still Governed by State Law WA MT

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Different Rules Regarding The Enforcement of Your Restrictive Covenant

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Is The Forfeiture Clause Enforceable Only If The Covenant Is Enforceable? WA MT

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Is The Forfeiture Clause Enforceable Only If The Covenant Is Enforceable?

Exxon Mobil Corp. v. Drennen, No. 12-0621, 2014 Tex. LEXIS 760 (2014) (enforcing forfeiture clause in non-contributoryWAprofit-sharing because such clauses are “clearly . . . not covenants not to compete.” The clauses merely force the employee to choose between competing without restraint and accepting MT ME ND the benefits ofORthe profit-sharing plan.) VT MN

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NY SD Spitz v. Berlin Indus. Inc., 1994 WL 194051 (N.D. Ill., May 13, 1994) (reasonableness requirement and RI MI WY indeed, state law as a whole, not analyzed in non-competition forfeiture clauses; "forfeiture provisions, CT PA IA NE unlike covenants not one's ability to earn a livelihood. Id. For thatNJreason, NV to compete, do not threaten OH IN DE forfeiture provisions need UT not be analyzed like covenants not toILcompete.") CA

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MD

Tatom v. Ameritech Corp. and Ameritech Information Systems, Inc., 305 F.3d 737, 744 (7th Cir. 2002) NC TN (Refusing to apply reasonableness analysis because forfeiture clause was not an "unreasonable restraint OK AZ AR NM on trade"; "Federal cases draw a distinction between provisions that prevent anSC employee from working for a competitor and those that call for a forfeiture of certain benefits shouldGAhe do so.") AL MS TX

LA Eastern Carolina Internal Medicine, P.A. v. Faidas, 149 N.C. App. 940, 945, 564 S.E.2d 53, 56 (N.C. App. 2002) (applying forfeiture clause in stock option plan regardless of reasonableness FL factors; "forfeiture clause is not a covenant not to compete and we do not subject it to the strict scrutiny as to reasonableness and AK public policy required with a covenant not to compete"). HI

Rosen v. Smith Barney, Inc., 393 N.J.Super. 578, 594, 925 A.2d 32, 42 (N.J. Super. A.D. 2007) (applying forfeiture clause in stock option plan regardless of reasonableness factors; "Although the forfeiture clause may be an inhibitive influence on an employee's decision whether to accept a new job, we do © not consider it unreasonable or invalid per se.")

Is The Forfeiture Clause Enforceable Only If The Covenant Is Enforceable? WA MT

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Is The Forfeiture Clause Enforceable Only If The Covenant Is Enforceable? WA

Fraser v. Nationwide Mut. Ins. Co., 352 F.3d 107 (3d Cir. 2003) (remanding for lower court ME consideration and noting that aMTPennsylvaniaNDcourt will uphold a forfeiture-for-competition provision if: VT 1) it “relate[s] by adequate consideration; [and] 3) [its OR to a contract for employment; 2) [it is] supported MN NH application is] reasonably limited in both time and territory). WI ID MA NY

SD

RI

MI

WY Muggill v. Reuben H. Donnelley Corp., 62 Cal.2d 239, 243 (Cal. 1965) (rejecting forfeiture clause; CT “the PA IA provision forfeiting plaintiff's pension rights if NE he works for a competitor restrains him from engaging in a NJ NV OH IN lawful business and is therefore void.”); see also Edwards v. Arthur Andersen LLP, 44 Cal.4th DE 937, 949, IL UT WV 189 P.3dCA 285, 293, 81 Cal.Rptr.3d 282, narrow-restraint CO 291 (Cal. 2008) (rejecting Ninth Circuit’s MD VA KS MO KY exception to section 16600). NC

Medtronic v. Hedemark, App. 2009) (findingTNforfeiture de facto restraint on OK AZ 2009 WL 511760 (Mn. Ct. AR NM SC trade and applying the reasonableness test). MS

AL

GA

Lavey v. Edwards, 264 Or. 331 (Or. 1973)(finding forfeiture de facto restraint on trade and applying the TX under such forfeiture provisions an employee has a reasonableness test and rejecting "the idea that LA real ‘freedom of choice’"). FL

Flammer v. Patton, 245 So. 2d 854 (Fla.) (1971) (restrictive non-competition covenant void to extent that pension plan AK did not contain reasonable restrictions; forfeiture clause "in effect impedes or HI restrains a former employee from exercising his lawful profession, trade or business.").

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Is The Forfeiture Clause Enforceable Only If The Covenant Is Enforceable? WA

Fraser v. Nationwide Mut. Ins. Co., 352 F.3d 107 (3d Cir. 2003) (remanding for lower court ME consideration and noting that aMTPennsylvaniaNDcourt will uphold a forfeiture-for-competition provision if: VT 1) it “relate[s] by adequate consideration; [and] 3) [its OR to a contract for employment; 2) [it is] supported MN NH application is] reasonably limited in both time and territory). WI ID MA NY

SD

RI

MI

WY Muggill v. Reuben H. Donnelley Corp., 62 Cal.2d 239, 243 (Cal. 1965) (rejecting forfeiture clause; CT “the PA IA provision forfeiting plaintiff's pension rights if NE he works for a competitor restrains him from engaging in a NJ NV OH IN lawful business and is therefore void.”); see also Edwards v. Arthur Andersen LLP, 44 Cal.4th DE 937, 949, IL UT WV 189 P.3dCA 285, 293, 81 Cal.Rptr.3d 282, narrow-restraint CO 291 (Cal. 2008) (rejecting Ninth Circuit’s MD VA KS MO KY exception to section 16600). NC

Medtronic v. Hedemark, App. 2009) (findingTNforfeiture de facto restraint on OK AZ 2009 WL 511760 (Mn. Ct. AR NM SC trade and applying the reasonableness test). MS

AL

GA

Lavey v. Edwards, 264 Or. 331 (Or. 1973)(finding forfeiture de facto restraint on trade and applying the TX under such forfeiture provisions an employee has a reasonableness test and rejecting "the idea that LA real ‘freedom of choice’"). FL

Flammer v. Patton, 245 So. 2d 854 (Fla.) (1971) (restrictive non-competition covenant void to extent that pension plan AK did not contain reasonable restrictions; forfeiture clause "in effect impedes or HI restrains a former employee from exercising his lawful profession, trade or business.").

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Practical Tips • Even if you’re including a restrictive covenant in a non-ERISA Plan, include language reserving the Company’s right to interpret the plan, and set up a review process to determine if the employee is competing. • Several Courts have recognized that when the Plan includes such language, subsequent Court review is limited to an “arbitrary and capricious” standard. Johns v. International Business Machines Corp., 361 F.Supp.2d 184 (S.D.N.Y. 2005) (an employer's decision regarding non-ERISA benefits may be set aside only where it is made in bad faith, was arbitrary or was the result of fraud); W.R. Berkley Corp. v. Hall, 2005 WL 406348, 4 (Del.Super. 2005) ("The parties agree that when a stock option committee is vested with final, binding and conclusive authority to determine a participant's right to receive or retain benefits, that decision made in accordance with the provisions of the agreement will not be second guessed by the Court absent a showing of fraud or bad faith."); Weir v. Anaconda Co. 773 F.2d 1073, 1079 (10th Cir. 1985) ("The district court correctly denied a de novo hearing and used the proper standard of review-whether the Committee's ruling was arbitrary, in bad faith, or fraudulent."); McIntyre v. Philadelphia Suburban Corp., 90 F.Supp.2d 596 (E.D. Pa. 2000) (whether to allow employee to exercise options was within the "sole authority of the Committee," which was granted "discretion" and whose determination was not "arbitrary, made in bad faith, or fraudulent, thereby justifying our review of its decision"); Noonan v. Staples, Inc., 556 F.3d 20, 34 (1st Cir. 2009) (our best prediction is that the Massachusetts Supreme Judicial Court would hold that [employer's] 'for cause' decision is not unreviewable, nor reviewable de novo, but instead that the courts may perform a limited review of the decision to determine if it was arbitrary, capricious, or made in bad faith.")

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Can You Obtain Equitable Relief If You Have A Claw Back? Is There An Adequate Remedy at Law? WA MT

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Can You Obtain Equitable Relief If You Have A Claw Back? Is There An Adequate Remedy at Law? WA

Majority View: Equitable relief available even where liquidated damages clause is present. MT ME ND

OR

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H&R Block Enterprises v. Short, 2006 WL 3437491 (D. Minn. 2006) (applying Missouri law;NH WI NY SD and an injunction where liquidated damages employer entitled to ID both monetary damages MI WYadequate). provided for in contract were not MN

NE

NV

PA

IA

MA RI CT NJ

OH IN Alexander & Alexander v.UTDrayton, 378 F.Supp. 824 (E.D. Pa. 1974) (rejecting argument that DE IL WV CO MD forfeitureCAclauses precluded injunctive relief). KS VA MO

KY

Bettinger v. Carl Berke Assoc., 455 Pa. 100 (Pa. 1974) (liquidated damages clauseNC in contract did TN OK AZ AR not bar employer from also seeking NM an injunction). SC MS

AL

GA

Bradley v. Health Coalition, 687 So.2d 329 (Fla. Ct. App. 1997) (liquidated damages clause in noncompetition agreement did not precludeTXan injunction). LA FL

Boulder Medical Center v. Moore, 651 P.2d 464 (Colo. Ct. App. 1982) (existence of a liquidated damages clause does not preclude an injunction). AK

HI

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Can You Obtain Equitable Relief If You Have A Claw Back? Is There An Adequate Remedy at Law? WA MT

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Can You Obtain Equitable Relief If You Have A Claw Back? Is There An Adequate Remedy at Law? WA MT

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VT Minority View: OR You may not be able to seek equitable MNrelief where the contract provides for NH forfeiture provision. ID WI

MA

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RI

MI

WY

College Life Ins. Co. of America v. Austin, 466 NE2d 738 (In. Ct. Appeals 1984) (affirming denial ofCT PA IA injunction; notingNV irreparable harm not found when NJ NE a legal remedy is set forth in the contract). IL

UT

IN

OH

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CO 690 NE2d 361 (In. Ct. Appeals 1998) Ed Bertholet that employer MD CA & Associates v. Stefanko, VA KS MO failed to show irreparable harm and noting that contract at issue containedKYa liquidated damages clause, setting an adequate remedy at law, and precluding an injunction). NC OK

AZ

WV (holding

TN

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SC Timm & Associates v. Broad, 2005 NM WL 3241832 (D.Minn. 2005) (agreeing in dicta that liquidated damages clause should preclude injunction). GA AL MS TX

LA FL

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Can You Obtain Equitable Relief If You Have A Claw Back? Is There An Adequate Remedy at Law? WA MT

ME

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OR

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MN ID

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MA RI CT NJ

NV Draft Language In Your Covenant Acknowledging ThatDE The OH IN IL UT WV CO Would Not Adequately Compensate MD CA Return of The Money You VA KS MO KY For The Harm Caused By Competition. TN NC NE

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Pros & Cons: Embedding The Covenant Into An ERISA Preempts State Law WA MT

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Pros & Cons: Embedding The Covenant Into An ERISA Preempts State Law WA

Benefits to using ERISA “Top Hat” Plan: MT

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1. Arbitrary and capricious standard ID 2. Preemption of state law

VT

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UT



NE

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IA IL

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VA KS ToCA qualify as an ERISA plan, the plan must systematically defer MO KY compensation until “termination” or “retirement.” It cannot be tied to an incentive planNCthat pays out TN money or equity during the term of employment. OK AZ



RI CT NJ

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Limitations On NV ERISA “Top Hat” Plan:

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Top Hat plans are unfunded and limited to a “select MS groupALof management or highly GA compensated employees”—rule of thumb is top 15%. TX

LA



Must file with DOL within 120 days of becoming subject to ERISA. 29FLCFR 2520.104-23.



It’s not clear AK that ERISA permits injunctive relief, so employer would need a second covenant outside the plan,HIand may be litigating in two forums—state court for the injunction and federal court over the claw back provisions. ©

• Protecting Your Trade Secrets/Avoiding Liability For Taking Your Competitors

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The Uniform Trade Secret Act 2. INJUNCTIVE RELIEF (a) Actual or threatened misappropriation may be enjoined. Upon application to the court an injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation. (b) In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances include, but are not limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable. (c) In appropriate circumstances, affirmative acts to protect a trade secret may be compelled by court order.

States That Adopt UTSA In Some Form WA MT

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MN ID

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NV UT CA

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IA IL

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CO KS

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NC

TN AR

SC MS

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LA FL

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RI CT NJ

MI

WY NE

HI

MA

NY

Adopted UTSA Not adopted

MD

The Inevitable Disclosure Doctrine

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The Inevitable Disclosure Doctrine

Inevitable Disclosure Typically Involves Three Elements: 1. The Employee Has Taken A Similar Position 2. The Employee Had High Level Access To Trade Secrets 3. There Is Evidence Demonstrating Lack Of Candor Or Untrustworthiness

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Inevitable Disclosure Doctrine WA MT

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Adopted Doctrine Rejected Doctrine Law is Unclear Never Considered

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Inevitable Disclosure Doctrine Cardinal Freight Carriers, Inc. v. J.B. Hunt Transport Servs., Inc., 987 S.W.2d 642, 647 (Ark. 1999) WA (affirming injunction and applying inevitable disclosure doctrine where evidence showed that former MT ME employee “had no compunction about usingND or disclosing information . . . to gain an unfair competitive VT OR advantage”). MN ID

NH

WI

SD

NY

MA

Branson Ultrasonics Corp. v. Stratman, 921 F. Supp. 909, (D. Conn. 1996) (enjoining former RI MI WY employee where evidence showed that the use and disclosure of plaintiff’s confidential information CT PA IA NJ was “inevitable”). NE NV UT

IL

IN

DE

PepsiCo,CAInc. v. Redmond, 54 1270-71 (7th Cir. 1995) (applying disclosure MD KS MO KY doctrine under Illinois law where defendants demonstrated a “lack of candor on their part and proof of their willingness to misuse [PepsiCo’s] trade secrets”). NC AZ

F.3dCO 1262,

OH

WV inevitable VA

OK

NM

TN

AR

SC Marcam Corp. v. Orchard, 885 F. Supp. 294, 298 (D. Mass. 1995) (enjoining former employee and concluding that “[i]t is difficult to conceive how all of the information stored inGA [defendant’s] memory AL MS can be set aside as he applies himself to a competitor’s business and its products”). TX

LA

Nucor Corp. v. Bell, 251 F.R.D. 191 (D.S.C. 2008) (based in part on the former employee’s bad faith FL and taking of his former employer’s documents, the court, in a case of first impression in South Carolina, applied the inevitable disclosure doctrine and found that the former employer’s new AKinevitably require him to disclose the purported trade secrets). employment would HI

Adopted Doctrine Rugen v. Interactive Business Systems, Inc., 864 S.W.2d 548, 552 (Tex. App. Ct. 1993) (affirming Doctrine injunction where defendant “possess[ed] IBS’s confidential information”, wasRejected “in a position to use it” and probably would “use the information for her benefit and to the detrimentLaw of IBS”). is Unclear Never Considered

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Inevitable Disclosure Doctrine WA MT

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Adopted Doctrine Rejected Doctrine Law is Unclear Never Considered

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Inevitable Disclosure Doctrine Cardinal Freight Carriers, Inc. v. J.B. Hunt Transport Servs., Inc., 987 S.W.2d 642, 647 (Ark. 1999) WA Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1463 (Cal. App. Ct. 2002) (rejecting inevitable (affirming injunction and applying inevitable disclosure doctrine where evidence showed that former disclosure doctrine; “If a covenant not to compete . . . is part of the employment agreement, the MT ME employee “had no compunction about usingND or disclosing information . . . to gain an unfair competitive inevitable disclosure doctrine cannot be invoked to supplement the covenant, alter its meaning, or VT OR advantage”). MN make an otherwise unenforceable covenant enforceable.”). NH ID

SD

WI

NY

MA

Branson Ultrasonics Corp. v. Stratman, 921 F. Supp. 909, (D. Conn. 1996) (enjoining former MI Del Monte Fresh Produce Co. v.WY Dole Food Co., Inc., 148 F. Supp. 2d 1326, 1337 (S.D. Fla. 2001)RI employee where evidence showed that the use and disclosure of plaintiff’s confidential information CT PA (rejecting inevitable disclosure doctrine; “Absent evidence a IA of actual or threatened misappropriation, NJ was “inevitable”). NE NV court should not allow a plaintiff to use inevitable disclosure as an after-the-fact noncompete OH IN DE IL agreement to enjoin an UT employee from working for the employer of his or her choice.”). WV CO PepsiCo,CAInc. v. Redmond, 54 F.3d 1262, 1270-71 (7th Cir. 1995) (applying inevitable disclosure MD VA KS MO KY doctrine under Illinois law where defendants demonstrated a “lack of candor on their part and proof of INVESCO Institutional (N.A.), Inc. v. Johnson, 500 F. Supp. 2d 701 (W.D. Ky. 2007) (“The doctrine of their willingness to misuse [PepsiCo’s] trade secrets”). NC inevitable disclosure has not been approved by any Kentucky court or TN the Sixth Circuit…. Here, there OK AZ Kentucky legislature that is no indication from the such a doctrine would be improved.”). AR NM SC Marcam Corp. v. Orchard, 885 F. Supp. 294, 298 (D. Mass. 1995) (enjoining former employee and concluding that “[i]t is difficult to conceive how all of the information stored inGA [defendant’s] memory AL MS LeJeune v. Coin Acceptors, Inc., 849 A.2d 451, 467-472 (Md. 2004) (expressing concern that granting can be set aside as he applies himself to a competitor’s business and its products”). inevitable disclosure would impose a restrictive covenant where the previous employer had not taken TX LA the opportunity to negotiate for one). Nucor Corp. v. Bell, 251 F.R.D. 191 (D.S.C. 2008) (based in part on the former employee’s bad faith FL and taking of his former employer’s documents, the court, in a case of first impression in South Gov’t Tech. Serv., Inc. v. Intellisys Technology Corp., 51 Va. Cir. 55 (Va. Cir. Ct. 1999) (sustaining Carolina, applied the inevitable disclosure doctrine and found that the former employer’s new demurrer where plaintiff “fail[ed] to allege direct or indirect disclosure of confidential information . . . but AKinevitably require him to disclose the purported trade secrets). employment would rather states there was an ‘inevitable’ HI or conclusory disclosure”). Adopted Doctrine Rugen v. Interactive Business Systems, Inc., 864 S.W.2d 548, 552 (Tex. App. Ct. 1993) (affirming Doctrine injunction where defendant “possess[ed] IBS’s confidential information”, wasRejected “in a position to use it” and probably would “use the information for her benefit and to the detrimentLaw of IBS”). is Unclear Never Considered

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• Litigation Tips & Practical Strategies

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• Drafting Restrictive Covenants For Employees and Sale of Business • Utilizing Forfeiture and Clawback Provisions in Deferred Compensation Plans • Protecting Your Trade Secrets/Avoiding Liability For Taking Your Competitors • Litigation Tips & Practical Strategies

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Litigation Tips & Practical Strategies

What Information People Steal How They Steal The Information How We Catch Them ©

Litigation Tips & Practical Strategies Reasonable Measures To Preserve Secrecy of Your Information

Precautionary Measures To Minimize Liability When You’re Hiring Employees From Your Competitor

Communicating With Your Competitor When Litigation May Be Imminent

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What Information People Steal How They Steal The Information How We Catch Them

What Information People Steal

What Information People Steal

E-Mail:

Entire .pst files

Thousands of Emails

What Information People Steal Product Information:

What Information People Steal Product Information:

What Information People Steal Product Information:

Highly Confidential Information Regarding New Technology and Research & Development

Entire Folders Of Plaintiff’s Most Recent Competition With Defendant

Entire Folders Of Plaintiff’s Most Recent Competition With Defendant

Folders Containing Executive Level Information

Folders Containing Executive Level Information

What Information People Steal Customer Lists:

What Information People Steal Customer Lists:

Native “mail merge” version

What Information People Steal Everything AND the kitchen sink:

The Company’s Entire Shared Drive

EVERY CLIENT FOLDER

WhatThey How Information Steal The People Information Steal

WhatThey How Information Steal The People Information Steal

WhatThey How Information Steal The People Information Steal

How We Catch Them

How We Catch Them

Each time a user connects a device to a computer, it leaves a footprint showing: • First Time The Device Was Connected • Last Time The Device Was Connected • The Device Serial Number • The Device Type

3736

3233

3233

June 21

June 22

June 25

Defendant receives final Defendant accepts Defendant resigns offer letter from New New Employer’s offer from Plaintiff’s Employer employment; leaves behind one WD Passport drive

June 29

July 9

Defendant’s last day at Plaintiff’s

Defendant’s first day at New Employer

Defendant Repeatedly Uses The WD Passport Drive

7/9/12 Files Accessed

7/11/12

7/13/12

7/15/12

7/16/12

Files Accessed

Files Accessed

Files Accessed

Files Accessed

7/9/12

7/12/12

Defendant plugs the WD Passport Drive into his new employer’s computer

Defendant plugs the WD Passport Drive into his new employers’ computer

7/13/12 Defendant plugs the WD Passport Drive into his personal computer

7/16/12 Defendant plugs the WD Passport Drive into his personal computer

RFQ's RFQ #742 - TRW B299 Front Nodular Iron Quotation (BracketFile andExt Housing) Name Drawings Specifications RFQ #771 - Ductile Iron Spacers for Suspensions Supplier Quotations Timing C Wide Sedan Front Rotor C Wide Sedan Rear Rotor C-D Segment C-D Segment 16 inch Front Rotor RFQ's RFQ #599 DCX C-D Segment Requote Timing C-D Segment Drum Drawings Dunnage-Packaging DVP&R and Testing Engineering Documents Open Issues and Meeting Minutes Over Capacity Issue Prototypes PSO Product Reports Purchase Orders RFQ's RFQ #390 DCX C-D Segment RFQ #600 DCX C-D Segment Drum RFQ #654 DCX C-D Segment Drum Volume Increase Timing Competitive Assessment Matrix CT RFQ's RFQ #471a - CT Pacifica Requote RFQ #471b - CT Pacifica Requote (Front) RFQ #526 - CT-RClass-CT41 Quotation DH-D1 and DC SRW RFQ's RFQ#778 - DH-D1 and DC SRW Quote DS-DS74 RFQ #576 - DS-DS74 Rear Rotor Quotation RFQ #584 - DS-DS74 Rear (Vented) Rotor Quotation RFQ #776 - MY2012 DS HD Rotor Economic Recovery 2008 FF - Fiat 500 DVP&R and Testing RFQ #799 - Fiat 500 Front and Rear Rotor Quotation JR Drum RFQ's RFQ #578 - DCX JR Drum to GAZ (Russia Federation) JS Engineering Documentation

8/30/2010 7:40 8/30/2010 Last7:40 Accessed 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40 8/30/2010 7:40

How We Catch Them 1 Hour Before Resigning, At Exactly 7:40 AM, John Doe Copied Approximately 100 Complete File Folders of Plaintiff’s Proprietary Pricing, Design, and Customer Information

How We Catch Them

https://www.dropbox.com/ https://www.docs.google.com https://www.box.net https://www.sugarsync.com/

Litigation Tips & Practical Strategies Reasonable Measures To Preserve Secrecy of Your Information

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Reasonable Measures to Protect Trade Secrets In order to protect a company’s trade secrets and confidential information, employers must take “reasonable measures” to safeguard such information. If protections are not taken, courts will deny relief to an employer when an employee steals or misappropriates proprietary information. In general, “reasonable measures” are just that – reasonable steps to safeguard information. Employers utilizing measures such as password protected databases to store information, marking documents as Confidential and having those exposed to information sign non-disclosure agreements are found widely found by courts to have employed reasonable measures. Haggard v. Spine, 2009 WL 1655030 (D.Colo. 2009)(employer took reasonable measures to protect trade secrets where it required nondisclosure agreements from employees working in product development; sent a “kill e-mail” to former employees after termination to delete any of employer’s files and e-mails stored on recipient’s computer). SKF USA, Inc. v. Bjerkness, 636 F.Supp.2d 696 (N.D.Ill. 2009)(employer took reasonable measures to protect trade secrets where it only shared information with customers after obtaining a non-disclosure agreement and password protected its database). Xantrex Tech., Inc. v. Advanced Energy Indus., Inc., 2008 WL 2185882 (D.Colo. 2008)(employer took reasonable measures to protect trade secrets where it had employees sign non-disclosure agreements and kept important documents on a secure, user-access controlled server). Certrifugal Acquisition Corp., Inc. v. Moon, 849 F.Supp.2d 814 (E.D.Wisc. 2012)(employer took reasonable measures to protect trade secrets where it kept outsiders from entering the plant where products made, kept highly confidential information about machines used, settings for machines and parameters for making products secret except for those on a need-to-know basis, used a password protected computer and required those with access to this information to sign confidentiality agreements). U.S. v. Lange, 312 F.3d 263 (7th Cir. 2002)(finding reasonable measures to protect trade secrets taken where documents information was stored in a locked room, with an alarm and monitoring system, the number of copies of sensitive information was kept to a minimum and extra copies shredded, employees receive notices when working with confidential information, documents contain notice if information is protected by a patent).

The Traditional Methods

Make sure your handbook has a strong confidentiality statement; Ensure that access to confidential information is only provided to those employees who have a need to know;

Work with your IT group to prevent employees from copying or printing certain extremely sensitive information;

Have employees regularly acknowledge that the information they are accessing is confidential and is to be used for business purposes only.

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I understand that the information that I am accessing is confidential and proprietary. I agree that I will not use, disclose, or reveal this information to any person except when acting within the scope of my responsibilities for the Company

I Agree

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The Traditional Methods

Make sure your handbook has a strong confidentiality statement; Ensure that access to confidential information is only provided to those employees who have a need to know;

Work with your IT group to prevent employees from copying or printing certain extremely sensitive information;

Have employees regularly acknowledge that the information they are accessing is confidential and is to be used for business purposes only.

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Data Loss Prevention Software

• Prevents employees from sending external emails that attach documents marked “confidential” • Prevent employees from emailing documents with certain terms, e.g., profit, or a project name • Prevent employees from emailing documents with Social Security numbers, or account numbers • Other options: WebSense

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Data Loss Prevention Software •

Programs that limit a user’s ability to copy or print types of files, e.g., computer code, or access databases;



Logs that track usage, copying and printing, and also send alerts to management when employees engage in unusual behavior;



Software that forces employees to use companyissued, encrypted flash drives, which only work on company computers and can prevent employees from installing cloud applications like Dropbox and Google Drive.



Other Options: Verdasys Digital Guardian, RDA Data Loss Prevention

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Litigation Tips & Practical Strategies Reasonable Measures To Preserve Secrecy of Your Information

Precautionary Measures To Minimize Liability When You’re Hiring Employees From Your Competitor

Communicating With Your Competitor When Litigation May Be Imminent

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Litigation Tips & Practical Strategies

Precautionary Measures To Minimize Liability When You’re Hiring Employees From Your Competitor

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Litigation Tips & Practical Strategies

Precautionary Measures To Minimize Liability When You’re Hiring Employees From Your Competitor

• Tortious Interference with your competitor’s restrictive covenants; Communicating With Your Competitor When Litigation May Be Imminent • Misappropriation of Trade Secret ©

Tortious Interference Courts evaluating whether a competitor has used improper means to induce breach of a noncompete have looked to a variety of factors: (1) Did the new employer induce the breach through active conduct? Hilb Rogal & Hobbs of Massachusetts LLC v. Sheppard, 24 Mass. L. Rep. 381 (2007)(competitor who “actively encouraged” new employees to break their non-competes “supplie[d] the element of improper means”); Sulzer Carbomedics, Inc. v. Oregon CardioDevices, Inc., 257 F.3d 449, 453-54 (5th Cir. 2001)(“affirmative inducement” satisfies the “improper motive or means element”).

(2) Was the breach accompanied by other statutory or common law violations, e.g., breach of fiduciary duty or misappropriation of trade secrets? The Prudential Life Ins. Co. of America v. Sipula, 776 F.2d 157, 162-64 (7th Cir. 1985) (improper means satisfied where sales representative used confidential client information to solicit his former clients); Custard Insurance Adjustors, Inc. v. Nardi, 2000 Conn. Super. LEXIS 1003, *144-47 (2000)(relying on new manager’s breach of his duty of loyalty to secure competitor’s employees is improper means).

(3) Did the new employer subsequently violate any injunction? Fowler v. Printers II, Inc., 598 A.2d 794, 805 (Md. App. 1991)(improper means established when, after the employees were enjoined from soliciting business from customers, the new employer tried to circumvent the injunction by doing the solicitation itself).

(4) Did the new employer subsequently ratify the conduct? Fowler v. Printers II, Inc., 598 A.2d 794, 805 (Md. App. 1991)(improper means established when new employer “acquiesced in or benefited from the wrongs of the employees’ breach”)

Tortious Interference DO NOT provide an open ended indemnity: Carroll Anesthesia Assocs, P.C. v. Anesthecare, Inc., 507 S.E.2d 829, 832 (Ga. App. 1998) (recognizing that “by indemnifying the [former employees] against any judgment obtained by [their former employer],” the new employer could be found to have “interfered with the [noncompete] contracts and encouraged the [former employees] to breach the post-termination terms”). United Labs, Inc. v. Kuykendall, 370 S.E.2d 375, 387-88 (N.C. 1988)(observing that new employer’s agreement “to pay all legal expenses, if any, [defendant] would incur as a result of breaching [his] covenants” was evidence that the new employer “purposely and maliciously solicited customers of plaintiff in violation of the covenants not to compete”). Security Title Agency, Inc. v. Pope, 2008 Ariz. App. LEXIS 118, *42 (2008)(affirming verdict that new employer aided and abetted the individual defendant’s breach of fiduciary duty; “The jury reasonably could infer that [the new employer] resolved to offer Pope a broad indemnity so she would feel free to continue her efforts to recruit [plaintiff’s] employees”).

Tortious Interference DO NOT provide an open ended indemnity: Carroll Anesthesia Assocs, P.C. v. Anesthecare, Inc., 507 S.E.2d 829, 832 (Ga. App. 1998) (recognizing that “by indemnifying the [former employees] against any judgment obtained by [their former employer],” the new employer could be found to have “interfered with the [nonAny indemnity clause must providetothat indemnification compete] contracts and encouraged theclearly [former employees] breach the post-termination terms”). will only be provided if the employee complies with the

restrictions forth in 370 his S.E.2d agreement. there is any question United Labs, Inc.set v. Kuykendall, 375, 387-88If (N.C. 1988)(observing that new employer’s agreement conduct “to pay all legal expenses, if any, [defendant] would the incur employee as a result of about whether may violate the covenant, breaching [his] covenants” was evidence that the new employer “purposely and maliciously must guidance Human Resources (not Legal, which solicitedseek customers of plaintiff from in violation of the covenants not to compete”). would waive privilege). Security Title Agency, Inc. v. Pope, 2008 Ariz. App. LEXIS 118, *42 (2008)(affirming verdict that new employer aided and abetted the individual defendant’s breach of fiduciary duty; “The jury reasonably could infer that [the new employer] resolved to offer Pope a broad indemnity so she would feel free to continue her efforts to recruit [plaintiff’s] employees”).

States That Formally Acknowledge Vicarious Liability WA MT

ME

ND

OR

VT

MN ID

NH

WI

SD

NV UT CA

PA

IA IL

OH

IN

DE WV

CO KS

AZ

OK

NM

MO

TX

VA

KY

NC

TN AR

SC MS

AL

GA

LA FL

AK

RI CT NJ

MI

WY NE

HI

MA

NY

Vicarious liability No vicarious liability

MD

States That Formally Acknowledge Vicarious Liability WA MT

ME

ND

OR

VT

MN ID

NH

WI

SD

NY MI

WY

PA

MA RI CT NJ

IA Infinity Products, Inc. v. Herbert Quandt, et al., 775 NE 2d 1144 (Ind. Ct. App. 2002)(holding NE NV OH IN IL that under Indiana Trade stringent preemptionDEclause UT Secrets Act, which includes a more WV CO MD VA than otherCAstates, all laws pertaining to misappropriation are preempted by the ITSA, KS MO KY which does not recognize vicarious liability for misappropriation of trade NC secrets) AZ

OK

NM

TN

AR

SC MS

TX

AL

GA

LA FL

AK

HI

Vicarious liability No vicarious liability

States That Formally Acknowledge Vicarious Liability PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1368 (Cal. Ct. App. 2000) (corporate officer defendants may be vicariously liable for their corporation’s UTSA violations). WA

MTN.W.2d 497, ND Hagen v. Burmeister & Assoc., Inc., 633 504 (Minn.2001)(employer can be vicariously liable forME VT and the misappropriationORof trade secrets under the Minnesota Trade Secrets Act because it is an intentional tort MN NH doctrine of respondeat superior applies). ID

WI

SD

MA

NY

RI MI WYP.3d 202 (Ok. Ct. App. 2010)(denying summary MTG Guarnieri Mfg., Inc. v. Clouatre, 239 judgment former employer; CT PA IA new employer could be held vicariously liable for trade secrets misappropriation under the doctrine of respondeat NJ NE NV OH superior if misappropriation is found). IN DE IL UT

CA

WV

CO

MD

KS(Ohio Ct. MO Buckeye Business Forms, Inc. v. Sutton, 1999 WL 1140160 of App. 1999)(trade secretsVA not misappropriated, KY so no finding of vicarious liability; however, noted that doctrine of respondeat superior might have been applicable NC TN in trade secrets misappropriation situation). OK AZ

NM

AR

SC

Bohnsack v. Varco, L.P., 668 F.3d 262 (5th Cir. 2012)(applying Texas law)(under traditional agency principals GA AL MS employers are vicariously liable for employee’s misappropriation of trade secrets where employee is acting within the scope of his employment). TX LA

FL Newport News Indus. V. Dynamic Testing, Inc., 130 F.Supp.2d 745 (E.D.Va. 2001) (applying Virginia law)(employer can be vicariously liable for misappropriation of trade secrets; preemption clause in Virginia Trade Secrets Act, does not preempt claims of vicarious AK liability because vicarious liability assess responsibility not because of conduct under the Act but because of an employer’s status as HI such).

Vicarious liability

Thola v. Henschell, 140 Wash.App.70 (Ct. of App. 2007)(employer canNo bevicarious vicariously liable for misappropriation of liability trade secrets; preemption clause in Washington Trade Secrets Act, does not preempt general civil liability principles, including vicarious liability).

Create “Evidence” That You’re Complying With The Covenant

Create “Evidence” That You’re Complying With The Covenant

Managing Communications Between The Business and Candidate

Lawyer To HR: “I believe the non-compete is unenforceable”

HR To Recruiter: “Our lawyer says the noncompete is unenforceable”

Recruiter To Candidate: “They say the non-compete is unenforceable”

Tortious Interference Do Not Discuss in Writing:

Tortious Interference Do Not Discuss in Writing:

Litigation Tips & Practical Strategies

Communicating With Your Competitor When Litigation May Be Imminent

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Litigation Tips & Practical Strategies Reasonable Measures To Preserve Secrecy of Your Information

Precautionary Measures To Minimize Liability When You’re Hiring Employees From Your Competitor

Communicating With Your Competitor When Litigation May Be Imminent

©

Example of How NOT to Draft A Letter Dear John, I am in receipt of your resignation letter. Please remember that as condition of your employment with Acme Co., you signed a noncompete agreement. That noncompete agreement provides that for a period of two years after your employment with Acme, you will not solicit Acme’s customers or employees; and that you will not retain, use, or disclose any of Acme’s proprietary trade secrets or confidential information. This letter is a reminder that you are obligated to abide by the terms of your non-compete agreement. Please be advised that Acme will take all steps necessary to ensure their interests are protected, including filing a lawsuit against you and/or your new employer. ©

The Response You Will Get:

our Company

our Company. Our

Acme employees, your company’s confidential,

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The Response You Will Get:

our Company

Generic Reminders Prompt Generic Denials

our Company. Our

Acme employees, your company’s confidential,

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Highlights from PepsiCo and Bimbo Inevitable Disclosure Typically Involves Three Elements: 1. The Employee Has Taken A Similar Position 2. The Employee Had High Level Access To Trade Secrets 3. There Is Evidence Demonstrating Lack Of Candor Or Untrustworthiness

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Highlights from PepsiCo and Bimbo Inevitable Disclosure Typically Involves Three Elements: 1. The Employee Has Taken A Similar Position 2. The Employee Had High Level Access To Trade Secrets 3. There Is Evidence Demonstrating Lack Of Candor Or Untrustworthiness

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Draft A Letter That Ask Questions Dear Former Employee, I am in receipt of your resignation letter. As a condition of your employment with Acme Co., you signed a non-compete agreement which prohibits you from you from working for a competitor for two years. It has come to our attention that you may have accepted employment with a competitor of Acme Co. In order to assure Acme that you are abiding by the terms of your non-compete agreement, we would like some basic information: • You participated in year-end strategic planning meetings less than 30 days before your resignation. Please tell us when you first accepted employment with your new employer. • Please confirm, by signing the attached affirmation, that prior to your resignation you returned, and did not take any of the Company’s proprietary, confidential information.

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Draft A Letter That Ask Questions Dear Former Employee, I am in receipt of your resignation letter. As a condition of your employment with Acme Co., you signed a non-compete agreement which prohibits you from you from working for a competitor for two years. It has come to our attention that you may have accepted employment with a competitor of Acme Co. In order to assure Acme that you are abiding by the terms of your non-compete agreement, we would like some basic information: •Where are you currently working? •What is your position with your new employer? •What are your responsibilities? •Have you and your new employer put in place any protections to ensure that you are not violating your agreement with Acme and that you will not disclose, rely upon or use Acme’s confidential, proprietary information? If so, what is that plan? ©

Draft A Letter That Ask Questions Dear Former Employee, I am in receipt of your resignation letter. As a condition of your employment with Acme Co., you signed a non-compete agreement which prohibits you from you from working for a competitor for two years. It has come to our attention that you may have accepted employment with a competitor of Acme Co. In order to assure Acme that you are abiding by the terms of your non-compete agreement, we would like some basic information: •Where are you currently working? •What is your position with your new employer? •What are your responsibilities? •Have you and your new employer put in place any protections to ensure that you are not violating your agreement with Acme and that you will not disclose, rely upon or use Acme’s confidential, proprietary information? If so, what is that plan? ©

What If You’re On The Defensive • Stave off a TRO by providing enough assurance and a cooperative spirit that the letter keeps them from filing; • Shift burden to former employer to be very specific about what its trade secrets are, and measures they recommend we take; • Imply that they will have to expose their trade secrets in litigation and all of their measures to maintain as secret will be under scrutiny.

Dear Mr. Jones: Thank you for your letter. ACME takes your concerns very seriously. We have confirmed with Ms. Smith she has already returned any of ABC’s confidential information that she may have had in her possession prior to her resignation. Likewise, we have made it clear to Ms. Smith that she is not to reveal any of ACME’s confidential information, such as business strategies, marketing strategies, pricing, vendors, etc. If you have concerns that Ms. Smith may be at risk of disclosing your confidential information despite our commitment, it would be helpful if you could provide a detailed description of the information that Ms. Jones had access to while employed at ABC. Once you provide that information, we can then compare your information with her current job duties to ensure that no inadvertent disclosure occurs. Sincerely, Rachel Cowen

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