Category: Employment Litigation

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Critical Issues in Negotiating Separation Agreements

Whether the employment relationship ends with a celebratory retirement party after many years, dissolves upon the decision of either party after a short time, or under other circumstances, all employment relationships eventually end. This article will briefly describe some of the provisions that should be considered by employers and executives for inclusion in a separation agreement.

Stating the Last Day of Employment:

At the risk of stating the obvious, the separation agreement must identify the date on which the employment ceased or is to cease. The agreement should state that all salary, bonuses, commissions, and any other monetary benefits have been paid as of the date of the separation agreement or identify the specific amounts that are outstanding and when such payment(s) will be made.

Although a separation agreement is sometimes presented to an employee at the time of termination, it is appropriate in some employment arrangements, particularly outside of the financial services industry, for there to be a transition period during which the employee is expected to either continue performing her or his duties as usual, certain defined duties, or simply assist in the transition. If the employee’s responsibilities are being modified during the transition period, they should be specified to the extent possible.

Cooperation Provision:

Employers should generally include a provision requiring the former employee to cooperate with respect to matters relating to her or his former employment. Counsel for the former employee should modify the cooperation provision to ensure that the former employee’s obligations are to only cooperate reasonably and at times that are mutually convenient and not disruptive of any future employment. Such counsel should also insist on a provision pursuant to which the former employee will be compensated for all expenses incurred in connection with satisfying her or his cooperation obligations.

Severance Payments:

Severance payments are included in almost all separation agreements as the consideration for the general release that employers appropriately insist upon. Although severance payments are often proposed based on a number of weeks or months per years of employment, employees should generally seek to negotiate for increased monetary amounts.

If an employee is asked to agree to what he or she considers to be overly restrictive non-compete provisions, he or she should seek additional monetary compensation. However, employers should defer payment of some severance compensation to try to ensure the former employee’s compliance with his or her obligations under the agreement.

Bonus payments are typically forfeited by employees who are not employed on the date bonuses are paid; however, executives are sometimes able to negotiate to be paid prorated or agreed upon bonus amounts for services rendered until the termination date.

When executives have equity rights, such rights are governed by the applicable plan documents or awards and that should be stated specifically in the separation agreement. Employees generally forfeit unvested restricted stock units and stock options upon the cessation of employment. However, it is sometimes possible for executives to negotiate for the acceleration of certain unvested restricted stock units or stock options.

Continued Health Insurance:

As is well known, former employees of companies which employed at least 20 employees on more than 50 percent of its typical business days in the previous calendar year are always entitled to continued health insurance through COBRA for a period of 18 months or longer under certain circumstance. Separation agreements often require the former employer to pay COBRA premiums for an agreed upon period of time or until the former employee becomes eligible for other insurance through a new employer in which event the agreement should require the former employee to provide notice to the former employer.

Company Property and Confidentiality Agreement:

All separation agreements should contain a provision pursuant to which the former employee confirms that all property of the company or any of its affiliates, such as computers, key cards, company credit cards, contacts, notes, files, software, and any confidential information, has been returned or specify a date by which they will be returned and, if appropriate, how that it is to be accomplished logistically.

Confidentiality agreements, usually executed by employees when joining a firm, prevent employees from disclosing proprietary company information both during and after the employment ends. Any such agreement which is in place should be cited in the separation agreement. If an employee is not already subject to a confidentiality agreement, there should be a confidentiality provision in the separation agreement. In the view of this commentator, it is almost always in the interests of the former employee to seek to have the confidentiality obligations be mutual so that the former employer cannot disclose the circumstances of the separation.

Counsel for employers should consider including a provision in all separation agreements which entitle the former employer to claw back severance payments and cease making any additional installment payments in the event that the former employee has breached any provision of the agreement. Counsel for employers sometimes include a provision exempting a small amount of the severance payment from the claw back in the hope of avoiding an argument that the claw back eliminated the consideration pursuant to which the former employee released all claims and that the release is therefore unenforceable.

Company Responses to Inquiries and Reference Letters:

Separation agreements of senior personnel often provide the former executive with a certain period of outplacement services to assist him or her in securing his or her next position. It is often in the best interests of both parties for the separation agreement to provide that the company will respond to inquiries from prospective employers by solely providing the former employee’s dates of employment and the last position he or she held.

We have been involved in several recent matters where, at the request of the former senior executive who we represented, several “C” suite executives were identified in the separation agreement with their consent as the only personnel authorized to provide reference information about the former executive beyond her or his dates of employment and last position. In two recent matters, we negotiated to have a reference letter signed by the CEO attached as an exhibit to the separation agreement with a provision that the company must make it available exclusively in response to any inquiries about the former executive.

In this commentator’s view, all separation agreements, indeed all agreements, should have choice of law and choice of venue provisions. A separation agreement should also provide that it is the entire agreement between the parties and supersedes any prior agreements between them.


In exchange for receiving various types of severance compensation, the former employee should always be required to release all claims, whether known or unknown, on behalf of himself or herself and all heirs against the former employer. The former employee should also be required to agree to a covenant not to sue the company or to become a member of any class seeking to sue the company or to provide any assistance to any persons suing the company.

Ideally from the former employee’s perspective, the former employer should also agree to release the former employee from all known claims (at a minimum) up to the date of the release. However, companies are often very reluctant to release claims against former employees that are not already known to the company since doing so would relegate the company if it subsequently learned of such a claim to an argument that, mindful of his improper conduct, the former employee fraudulently induced the company into signing the separation agreement. Of course, a factual dispute could eventually ensue in a litigation as to whether a particular claim was known by the company at the time the agreement was executed.

Non-Disparagement Provisions:

This commentator believes that counsel for a former employee should generally seek to have the non-disparagement provision in virtually all separation agreements be mutual. In those instances where company counsel refuses to do so, the following approach should be considered. The agreement could contain a provision requiring that: (i) several identified employees be notified in writing within a few business days after the execution of the agreement or the lapse of the revocation period not to disparage the former employee verbally or in writing; and (ii) the former employee’s counsel be notified in writing within one or two business days thereafter that such notification was sent. However, this commentator has represented several former executives who did not want any such persons to be so notified in the belief that doing so would “fan the flames” and have the opposite effect of what was intended.

Importance of Separation Agreements to Employers:

If there is a possibility that an employee has one or more causes of action against his or her former employer for any reason, he or she may be able to build a strong case in reliance upon his or her in-depth knowledge of the company. Of course, this is one of the main reasons why a former employer would want an assurance that the former employee cannot sue the employer. Avoiding potential lawsuits and the concomitant distraction to management and inevitable legal fees is generally of great benefit to a company and will often override the additional monetary and other compensation that former employees and their counsel will seek through negotiation. Separation agreements are also a useful way for a former employer to bolster an existing non-compete provision when it is considered desirable to do so in view of changed circumstances.

Importance of Separation Agreements to Former Employees:

In addition to receiving severance compensation, which sometimes also includes the acceleration of certain restricted stock units or stock options and company payment of COBRA insurance premiums for an agreed upon period of time, former employees can benefit from entering into a separation agreement by receiving, among other things: (i) a general release from their former employer or some variation thereof; (ii) a mutual non-disparagement provision or some variation thereof; (iii) agreed upon reference protocols which may include a reference letter to be used exclusively by the former employer in response to inquiries about the former employee; and (iv) limits on the former employee’s obligations to cooperate with her or his former employer in connection with matters concerning her or his former employment.

Of course, every situation is different. We regularly counsel senior and mid-level executives as well as companies in connection with their respective unique circumstances.

Richard B. Friedman
Richard Friedman PLLC

200 Park Avenue Suite 1700
New York, NY 10166
TEL: 212-600-9539
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Internal Investigations: Preserving the Attorney-Client Privilege & Avoiding Disqualification of Counsel

Determining whether an internal investigation should be led by the organization’s Human Resources personnel, in-house counsel, regular outside counsel, or non-regular outside counsel will generally hinge on the nature of the allegations and the target(s) of the allegations. Although HR personnel often conduct routine internal investigations, having them do so where litigation is reasonably anticipated in connection with the facts underlying the investigation is likely to result in the results of the investigation not being protected by the attorney-client privilege.  For that reason, and because of the expertise and experience that suitable counsel bring to an investigation, counsel should often be used to conduct an internal investigation.

When considering the role of in-house or outside counsel in conducting an internal investigation, it is critical to identify who the client is. NY RPC 1.13(a) states as follows: “A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.” Of course, joint representation by in-house or outside counsel of an organization and its directors, officers, or employees is permitted where no conflict of interest is believed to exist. However, a joint retainer agreement pursuant to which an organization and one or more of its agents retain the same law firm should provide that, if the firm seeks to withdraw from its representation of the individual(s) because the corporation’s interests eventually deviate from those of the person(s) being jointly represented or otherwise, each individual agrees that she or he will not move to disqualify the firm from continuing to represent the organization.

Having in-house counsel conduct an investigation is often more efficient than having outside counsel do so but could lead to the in-house counsel becoming a witness and therefore preventing the organization from maintaining the confidentiality of communications made to counsel by employees and other agents of the organization. Indeed, it is not uncommon for the lead attorney who conducted an internal investigation to be called upon to serve as a witness in the ensuing litigation. Should this happen, the attorney is highly unlikely to be able to represent the organization in the litigation in New York since NY RPC 3.7(a) states that: “[a] lawyer shall not advocate at a trial in which the lawyer is likely to be a necessary witness….”

Office of Disciplinary Counsel v. Cynthia Baldwin1 provides an admittedly dramatic cautionary tale of a nightmare which can occur when in-house counsel conducts an internal investigation who is not equipped to do so. In that case the Court held that Baldwin, Penn States’ former General Counsel, had violated ethical rules in her investigation of child abuse allegations against a former Penn State assistant football coach when she represented the University, its President, and two senior athletic personnel in connection with an internal investigation and their grand jury testimony.  Among other things, the Court concluded that: (i) there was a lack of clear communication by counsel as to the identity of the client(s) which led to confusion on the part of the individuals; and (ii) counsel has a duty to clarify the professional relationship when counsel and the organization’s personnel may not have the same understanding of the relationship. In the Penn State case, the Court held that the then General Counsel’s “simultaneous representations of Penn State, Curley, Schultz and Spanier reflected incompetence, violated her obligation to avoid conflicts of interest, resulted in the revelation of client confidences, and prejudiced the proper administration of justice in cases with significant personal and public effect.”2

Having outside counsel conduct an investigation with help from in-house counsel enables an organization to benefit from outside counsel’s expertise, should lead to a more objective analysis of the facts, is likely to be perceived as more credible than an investigation conducted solely by in-house counsel, and should make it more likely that the organization will be able to maintain the attorney-client privilege. However, having the investigation conducted by the firm that is expected to represent the organization in any litigation arising out of the facts underlying the investigation can make it more likely that at least the lead attorney who conducted the investigation would not be able to serve as litigation counsel because he or she could be called as a witness.

Although disqualification as litigation counsel should be limited to the attorneys who conducted the investigation and not imputed to their entire firm, employing a law firm to conduct an investigation which is not going to represent the organization in any litigation which ensues should offer the most protection against a motion to disqualify litigation counsel being successful and may deter adverse counsel from even filing it.

Further, having non-regular outside counsel conduct an internal investigation should lead to a more objective analysis than one conducted by in-house counsel or even regular outside counsel.  Perhaps equally if not more importantly, the investigation is likely to be perceived by outsiders, including government regulators and prosecutors, as more credible than one performed only by in-house counsel or regular outside counsel.  Such an investigation should also be easier to maintain as confidential subject to the attorney-client privilege.  However, since non-regular outside counsel will almost certainly lack a detailed knowledge of the organization, having in-house counsel assist such outside counsel could enable the organization to benefit from their respective perspectives and experiences.

In light of the foregoing, we believe that the use of a law firm which does not regularly represent an organization to conduct an internal investigation where litigation is reasonably expected can provide the greatest protection to: (i) preserve the attorney-client privilege; and (ii) deter or defeat a motion to disqualify another law firm representing the organization in a litigation arising out of the facts underlying the investigation.

Richard B. Friedman
Richard Friedman PLLC

200 Park Avenue Suite 1700
New York, NY 10166
TEL: 212-600-9539
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1 225 A.3d 817 (Pa. 2020).
2 858.

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Is the CFAA Violated when an Employee Accesses Authorized Information for an Improper Purpose?


Can an employee be found criminally or civilly liable under the Computer Fraud and Abuse Act (CFAA”) for accessing digital information to which she or he had authorization when done for an improper purpose? The answer prior to the June 2021 decision by the U.S. Supreme Court in Van Buren v. United States, 141 S. Ct. 1648 (2021), was unclear and varied between jurisdictions.

The Computer Fraud and Abuse Act:

Under the Computer Fraud and Abuse Act, civil and criminal liability may be pursued against any person who knowingly accesses a computer without authorization or “exceeds authorized access” to obtain and or misuse information from the computer.1 The Act defines “exceeds authorized access” as “access[ing] a computer with authorization to obtain or alter information in the computer that the accessor is not entitled so to obtain or alter…”2 The statute does not contain a definition of “with authorization” or “without authorization,” which contributed to inconsistent lower federal court decisions.

Van Buren’s Misuse:

Nathan Van Buren served as a sergeant in the Cumming, Georgia Police Department. His position afforded him authorized access to the Georgia Crime Information Center, which included the authority to scan license plates from his patrol car. Andrew Albo was known by the local police to patronize prostitutes and then accuse them of stealing money from him. Albo recorded a conversation in which Van Buren asked him for a $15,000 loan and provided the recording to the local sherrif’s office, alleging that Van Buren was “shaking him down.” After being contacted by the sheriff’s office, the FBI set up a sting operation in which Albo asked Van Burn to run the license plate of a stripper he was supposedly interested in soliciting for sexual services to see if she was an undercover police officer before he would provide Van Buren with the full amount of the loan. Van Buren complied with the request and was arrested. A jury convicted him under the CFAA and sentenced him to eighteen months in prison. Van Buren appealed to the Eleventh Circuit, arguing that the prosecution’s analysis of the CFAA, that an employee with authorized access to a database who used it for purposes inconsistent with the employer’s interest violated the CFAA, was flawed. In upholding the conviction, the Eleventh Circuit chose not to apply a narrower interpretation of “with authorization” that certain other circuit courts had used.

Supreme Court Decision:

In its Decision reversing the Eleventh Circuit, the Supreme Court held that the CFAA does not cover “those who… have improper motives for obtaining information that is otherwise available to them.”3 Specifically, Justice Amy Coney Barrett, writing for a majority of six, with Chief Justice Roberts and Justices Thomas and Alito in dissent, wrote that a person violates the “exceeds authorized access” language of the CFAA only when they access information that that is off-limits to them in a database or computer network to which they otherwise have access. Justice Barrett pointed out that Van Buren, on the other hand, obtained information to which he was entitled and held that the fact that he did so for an improper purpose did not violate the CFAA. A contrary holding that every violation of a computer-use policy violated the CFAA. Justice Barrett wrote, would lead to the conclusion that millions of otherwise law-abiding citizens could be subjected to criminal sanctions under the CFAA. Under the Court’s analysis, prosecutors and company plaintiffs would have to prove that an employee misused computers, servers, or software she or he did not have the authority to access, or whose access had expired, in order to convict or impose civil liability under the CFAA. Accessing data for a nefarious purpose, the Court held, is not alone sufficient to justify criminal or civil liability under the CFAA.

Justice Barrett wrote that Van Buren’s use of the license plate scanner in the manner he was permitted, “regardless of whether he [scanned] the information for a prohibited purpose,” did not violate the CFAA.4 The Government interpretation and Eleventh Circuit ruling would “attach criminal penalties to a breathtaking amount of commonplace computer activity…”5 adding “extra icing on a cake already frosted,” according to the majority.6

The decision in Van Buren means that the CFAA criminalizes computer hacking but does not extend to criminalize violations of “purpose-based limits contained in contracts and workplace policies.”7 A person with access to a set of files who uses them in a way prohibited by her or his employment contract would not violate the CFAA by doing so. An infraction would occur only if that person hacked into files he or she was unauthorized to use. Of course, such actions, though not criminal under the CFAA, would almost certainly violate company policies or breach an employment agreement.

Next Steps for Employers:

In view of Van Buren, employers concerned with protecting sensitive information on company servers should implement multiple measures to secure it such as:

  • Reassessing company security policies;
  • Investing in encryption software or renewing existing encryption services;
  • Requiring that existing employees and new hires sign confidentiality agreements; and
  • Limiting access to protected files to individuals responsible for their contents.

1 18 U.S.C § 1030(a)(2).
2 Id.
3 Van Buren v. United States, 141 S. Ct. 1648 at 1652.
4 Van Buren, 141 S. Ct. at 1654.
5 Id. at 1661.
6 Id. quoting Yates v. United States, 135 S. Ct. 1074 (2015)
7 Id. at 1662.

Richard B. Friedman
Richard Friedman PLLC

200 Park Avenue Suite 1700
New York, NY 10166
TEL: 212-600-9539
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Defend Trade Secrets Act of 2016: A Five Year Overview

The Defend Trade Secrets Act of 2016 (“DTSA”) turned five years old on May 11, 2021. As a follow-up to our last article concerning misappropriation of trade secrets litigation, we are devoting this article to a review of the litigations which have arisen out of this relatively new statute.

The DTSA created a private federal cause of action for misappropriate of trade secrets for the first time. The law states, in part, that “[a]n owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”1 Employers should consider invoking the statute in order to seek to prevent further disclosure of information they consider to be trade secrets if they: (i) believe such information may have already been exposed; (ii) seek to enjoin any further dissemination; (iii) seek to recover the alleged trade secrets; and/or (iv) seek to obtain monetary damages for losses related to the misappropriation, if any.

But there are quite a few defenses that defendants can assert to such an action, as was the case with the former senior partner of a preeminent consulting firm which our firm recently represented in an action in the District of New Jersey which was dismissed with prejudice in connection with settlements between the consulting firm and: (i) our client’s subsequent employer; and (ii) our client. Although our firm’s matters in recent years in this arena have been on behalf of defendants and prospective defendants, this article will hopefully provide some helpful suggestions for both plaintiffs and defendants under the DTSA.

Defining a Trade Secret

A company suing under the DTSA must prove that what has been misappropriated is in fact a trade secret. To succeed under the DTSA, a plaintiff must demonstrate both that it took reasonable measures to keep the information actually secret, and that the secret in question has economic value independent of not being generally known or available to ascertain by the public. Courts will generally then make a fact specific determination regarding whether the steps taken to keep the information secret were in fact “reasonable.” A useful illustration is WeRide Corporation, et al. v. Kun Huang, where the court held that restricting access with a password, encrypting the source code at issue, and requiring employees to sign guidelines that mandated protection of the company’s confidential information was enough to prove that reasonable measures had been taken with respect to the trade secrets.2 On the other hand, in Temuran v. Piccolo,3 the court held that sufficient steps had not been taken to protect the information at issue as the plaintiff had not alleged having employees sign any type of confidentiality agreement. A plaintiff must also allege more than an intent to keep information secret.4

Proving that a trade secret has independent economic value to the plaintiff is vital to a successful DTSA claim. In some instances a company can provide a court with a specific monetary value that was used to develop or create the trade secret. In WeRide, for example, the company alleged it spent over $45 million in developing the source code that was the trade secret at issue.5 Where monetary amounts can be proven with specificity, claiming that the trade secrets permit a company to maintain a competitive advantage can be enough to satisfy the independent economic value requirement in certain circumstances.6 However, if there is a means of recreating the information or a way to publicly access the information, the DTSA claim will fail on the grounds that the information has no special value to the company.

Using the Trade Secret in Interstate Commerce

The clause requiring the secret to be “related to a product or service used in, or intended for use in, interstate or foreign commerce”7 is understood broadly to mean that there must be some nexus with interstate commerce. Some examples that count for this requirement are: use of a former employer’s customer list to solicit out-of-state customers,8 sharing an employer’s trade secrets with customers around the world,9 soliciting business for a new employer from a former employer’s multi-state client contact list,10 shipping products to California customers from a Nevada warehouse,11 and using a former employer’s patient lists to solicit patients in a different state.12

Timing of Misappropriating the Trade Secret

Since the DTSA was only signed in 2016, some temporal issues arise in bringing a claim thereunder. The claim must be plead from the date of the initial misappropriation rather than the date when the plaintiff became aware of the misappropriation. However, some courts have sustained DTSA claims in response to motions to dismiss even if the misappropriation started before the law was enacted so long as it continued after the statute became law.13 At least one court has even allowed a claim to continue where there was pre-enactment taking of an alleged trade secret and post-enactment disclosure.14 Thus, while the law is technically forward looking from the time of enactment, courts have allowed claims to move forward in certain circumstances where the conduct straddled the effective date of the law.


If a plaintiff is successful in proving its case, it may be entitled to remedies at law and in equity. The law provides for ex parte seizures of the trade secrets. Compensatory damages can be measured by: (i) unjust enrichment to the extent not accounted for in the actual loss calculation; or (ii) a reasonable royalty for the unauthorized disclosure or use of the trade secret. Punitive damages are also available up to two times the amount of the damages for willful and malicious misappropriation. An ex parte seizure order can enable a plaintiff to seize electronic software or hardware, papers, and other information belonging to the defendant(s) that contain the plaintiff’s trade secrets.

The DTSA is a great tool in the toolbox of employers who believe their trade secrets have been misappropriated. However, ample defenses are available to a defendant which require a plaintiff to prove that the information allegedly misappropriated is entitled to legal protection.

1 18 U.S.C.A. § 1836 (b) (1)
2 WeRide Corp. v. Kun Huang, 379 F. Supp. 3d 834 (N.D. Cal. 2019)
3 Temurian v. Piccolo, No. 18-CV-62737, 2019 WL 1763022 (S.D. Fla. Apr. 22, 2019). The Court also noted:  “Generally, limiting employee access to the information and password-protecting the computer network on which the information resided [a]re positive steps in securing the alleged trade secret.”  Yellowfin Yachts, Inc., 898 F.3d at 1300.  However, those efforts may be undermined by the subsequent failure to safeguard the use of and access to the alleged trade secret.  Id. at 1301.  Indeed, “[d]isclosing the information to others who are under no obligation to protect the confidentiality of the information defeats any claim that the information is a trade secret.”  M.C. Dean, Inc. v. City of Miami Beach, Fla., 199 F. Supp. 3d 1349, 1353 (S.D. Fla. 2016)”
4 Dichard v. Morgan, 2017 WL 5634110, at *2-3 (D.N.H. Nov. 22, 2017)
5 WeRide Corp. v. Kun Huang, 379 F. Supp. 3d 834 (N.D. Cal. 2019)
6 See, e.g., Teva Pharm. USA, Inc. v. Sandhu, 291 F. Supp. 3d 659, 675 (E.D. Pa. 2018)
7 18 U.S.C.A. § 1836 (b) (1)
8 Complete Logistical Servs., LLC v. Rulh, 350 F. Supp. 3d 512, 520 (E.D. La. 2018)
9 Source Prod. & Equip. Co., Inc. v. Schehr, 2017 WL 3721543, at *3 (E.D. La. Aug. 29, 2017)
10 Wells Lamont Indus. Grp. LLC v. Mendoza, 2017 WL 3235682, at *3 (N.D. Ill. July 31, 2017)
11 Officia Imaging, Inc. v. Langridge, No. SACV172228DOCDFMX, 2018 WL 6137183 (C.D. Cal. Aug. 7, 2018)
12 Yager v. Vignieri, 2017 WL 4574487, at *2 (S.D.N.Y. Oct. 12, 2017)
13 See, e.g., Hermann Int’l Inc. v. Hermann Int’l Europe, 2021 WL 861712, at *15-16 (W.D.N.C. Mar. 8. 2021)
14 Agilysis, Inc. v. Hall, 258 F. Supp. 3d 1331, 1348-49 (N.D. Ga. 2017)

Richard B. Friedman
Richard Friedman PLLC

200 Park Avenue Suite 1700
New York, NY 10166
TEL: 212-600-9539
Connect with me on Linkedin

Misappropriation of Trade Secrets Litigation: A Brief Primer

Every state has common law or statutory law prohibitions against the theft or disclosure of trade secrets. The federal law is the Defend Trade Secrets Act of 2016 (the “DTSA”) (18 U.S.C. §1836, et seq.). New York relies on common law which creates civil liability for misappropriation of trade secrets.

Trade secrets are only protected under the DTSA if they are related to “a product or service used in, or intended for use in, interstate or foreign commerce.” (18 U.S.C. § 1836(b)).

  • What is a trade secret?
    • The DTSA defines the term “trade secret” to mean “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if:
      • a) the owner thereof has taken reasonable measures to keep such information secret; and
      • b) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” (18 U.S.C. § 1839(3)). Some courts have articulated the elements more specifically than the DTSA. 1
  • What is misappropriation?
    • There are two ways a person or company may be found liable in a civil action for misappropriation of trade secrets under the DTSA:
      • (1) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
      • (2) disclosure or use of a trade secret of another without express or implied consent. 2
      • When the alleged misappropriation is based on disclosure or use, the person who disclosed the information must have:
        • “(i) used improper means to acquire knowledge of the trade secret;
        • (ii) at the time of the disclosure or use, knew or had reason to know that the trade secret was;
          • (I) derived from or through a person who had used improper means to acquire the trade secret;
          • (II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
          • (III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret;
        • or (iii) before a material change of the position of the person, knew or had reason to know that—
          • (I) the trade secret was a trade secret; and
          • (II) knowledge of the trade secret had been acquired by accident or mistake.” 18 U.S.C. § 1839(5).
  • Preliminary Actions By Employer
    • Investigation
      • Conduct a forensic investigation to determine what, if any, information the employee actually misappropriated; and
      • Attempt to determine which information is truly a trade secret;
    • Commencing the Action
      • Forum: Unless there is an employment of other agreement between the employee and employer, the employer chooses the forum under the DTSA. Federal courts have pendent jurisdiction over related state law claims.
        • Since DTSA’s enactment, courts generally have analyzed DTSA and parallel state law claims consistently and have looked to DTSA jurisprudence to interpret DTSA definitions. 3
        • The DTSA creates a private cause of action for civil trade secret misappropriation under federal law (18 U.S.C. § 1836(b)). The law supplements but does not preempt or eliminate state law remedies for trade secret misappropriation.
      • Decide whether to add the former employee’s new employer and/or one or more third parties in the action.
      • Pleading stage
        • “At the pleading stage” of a DTSA claim, “a plaintiff need not spell out the details of the trade secret,” but must “describe the subject matter of the trade secret with sufficient particularity to . . . permit the defendant to ascertain at least the boundaries within which the secret lies.” 4
        • Employer must allege that it took reasonable steps to guard the secrecy of the allegedly misappropriated information. 5
      • Independent Economic Value
        • Failure to allege (and prove) independent economic value from the misappropriated information is fatal to a DTSA claim.
          • The competitive value requirement is not met if the public or a competitor can recreate the information. 6
      • Inevitable Disclosure Doctrine: This theory applies where it is allegedly impossible for the former employee to perform his or her new job without relying on the employee’s knowledge of the former employer’s trade secrets, disclosing them to the employee’s new employer, or both. Not every state recognizes this doctrine. 7
        • Under the DTSA, courts generally impose a higher burden on plaintiffs seeking relief (must show more than a former employee went to a direct competitor to do the same job, and the former employer fears the former employee will disclose trade secrets in doing that job). 8
      • Potential Additional Claims
        • Breach of Contract; Business Torts; Violation of Computer Fraud and Abuse Act.
    • Discovery
      • Interrogatories, document requests.
      • Expedited discovery if requesting injunctive relief.
    • Remedies/Relief
      • Injunctive relief;
      • Damages;
      • Attorney’s fees and other costs.
  • Potential Defenses/Counterclaims By Former Employee
    • Defenses
      • The information at issue is not a trade secret.
      • The former employer did not take appropriate steps to protect the secrecy of the information.
      • The information was not misappropriated.
    • Counterclaims
      • Unpaid wages, discrimination, retaliatory discharge.
    • The statute of limitations for DTSA is three years after the earlier of when the misappropriation either: (i) is discovered; or (ii) should have been discovered with reasonable diligence.
  • Confidentiality during litigation: One challenge for the plaintiff’ is that it must identify and describe the trade secrets it is seeking to protect. However, this issue can generally be resolved via:
    • An Order of Confidentiality; and
    • Filing certain documents under seal with the Court’s approval.


1 See, e.g., API Americas Inc. v. Miller, 380 F. Supp. 3d 1141, 1148 (D. Kan. 2019); Arctic Ener. Servs., LLC v. Neal, 2018 WL 1010939, at *2 (D. Colo. Feb. 22, 2018).
2 Brand Energy & Infrastructure Servs., Inc. v. Irex Contracting Grp., 2017 WL 1105648, at *3 (E.D. Pa. Mar. 24, 2017)).
3 See, e.g., Earthbound Corp. v. MiTek USA, Inc., 2016 WL 4418013, at *10 (W.D. Wash. Aug. 19, 2016).
4 Avaya, Inc. v. Cisco Sys., Inc., 2011 WL 4962817, at *3 (D.N.J. Oct. 18, 2011) (Bongiovanni, M.J.); see AlterG, Inc. v. Boost Treadmills LLC, 2019 WL 4221599, at *6 (N.D. Cal. Sept. 5, 2019).
5 See Dichard v. Morgan, 2017 WL 5634110, at *2-3 (D.N.H. Nov. 22, 2017) (plaintiff must allege more than an intent to keep information secret); CPI Card Grp., Inc. v. Dwyer, 294 F. Supp. 3d 791, 808 (D. Minn. 2018) (plaintiff must allege what steps it took to protect the specific information at issue, not merely the existence of general confidentiality policies).
6 WeRide Corp., 379 F. Supp. 3d at 847.
7 PepsiCo, Inc. v. Redmond, 154F3d 1262 (7th Cir. 1995).
8 PrimeSource Bldg. Prods., Inc. v. Huttig Bldg. Prods., Inc., 2017 WL 7795125, at *11-12 (N.D. Ill. Dec. 9, 2017.

Richard B. Friedman
Richard Friedman PLLC

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Current State of Restrictive Covenants (Other Than Non-Competes) in New York by Richard Friedman

Current State of Restrictive Covenants (other than Non-Competes) Under New York Law

What is a Restrictive Covenant?

Our last blog article provided an update on the state of New York law concerning non-compete provisions. This article focuses on the state of New York law concerning restrictive covenant provisions other than non-competes. As our readers are almost certainly all well aware, a restrictive covenant is a contractual provision that many employers include in employment and severance agreements as well as in contracts with respect to the sale of a business. Such provisions are designed to limit the activities of a former employee or a former owner of a company for a fixed period of time following the end of the employment relationship or after the sale of a company to protect the former employer’s or buyer’s supposed legitimate business interests. In addition to employment, severance, and agreements concerning the sale of a business, these covenants can often be found in stock option agreements.

Enforceability of Restrictive Covenants

As is well known, New York courts generally disfavor restrictive covenants contained in employment contracts and will only enforce them when they are found to be reasonable and necessary to protect an employer’s legitimate business interests.1  The test New York courts use to determine whether a restrictive covenant is reasonable was relied on recently by the United States District Court for the Eastern District of New York in Intertek Testing Servs., N.A., Inc. v. Pennisi.2 The court stated: “[a] restraint is reasonable only if it: (1) is no greater than is required for the protection of a legitimate interest of the employer; (2) does not impose undue hardship of the employee; and (3) is not injurious to the public.” Applying this test, New York courts analyzing a restrictive covenant take a two-step approach:3

  1. The court first considers whether the covenant is reasonable in scope and duration; and
  2. If the answer to the foregoing is yes, courts consider whether the contract, as written, is necessary to protect the employer’s legitimate interest.

Scope and Duration

To be enforceable, a restrictive covenant must not be more extensive, in terms of time and place, than necessary to protect the legitimate interests of the employer. A court may find a restriction to be unreasonable when it covers a geographic area where the employer does not compete, or where the provision would effectively prevent the employee from continuing to work in a particular industry.4 For this reason, New York courts have rarely found worldwide restrictions reasonable in any context.

Legitimate Interests

New York courts have held that legitimate interests are limited to the protection against misappropriation of the former employer’s trade secrets, confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary.5 Additionally, such courts have found that an employer has a legitimate interest in protecting client relationships or goodwill developed by an employee at the employer’s expense.6

Types of Restrictive Covenants

Although non-compete provisions are the most common type of restrictive covenants, New York courts recognize the following other types of restrictive covenants:

  • non-solicitation provisions with respect to clients or customers;
  • no-hire provisions; and
  • “garden leave” provisions.

1.  Non-solicitation Provisions

A non-solicitation provision is a restrictive covenant that prohibits former employees or the former owner of a business, for a specific period of time after the employment relationship ceased or the sale occurred, from soliciting the former employer’s or previously owned company’s customers or providing competing services to those customers.7 They often also prohibit the former employee or owner from trying, directly or indirectly, to secure business from the former employer’s or previously owned company’s customers.8

A non-solicitation provision as applied to customers is typically easier to enforce than a non-compete provision because it only restricts the former employee or owner from soliciting and/or performing services for certain categories of customers or specifically identified customers for a designated time period.9 King v. Marsh & McLennan Agency LLC10 is an example of a recent case in which a New York court enforced a non-solicitation provision for customers. In King, the Court held that the employer had an undeniable interest in enforcing a non-solicitation agreement to protect its customer relationships.

Non-solicitation provisions eliminate the need for the court to evaluate the reasonableness of a geographic restriction.11 Additionally, the absence of a non-compete provision also increases the likelihood that the court will find the non-solicitation clause in an employment agreement enforceable.12

Yet New York courts have found that a non-solicitation provision is too broad to be enforced as written if it is not necessary to protect one of the following three legitimate protectable interests:

      • the uniqueness of the employee (which is difficult to establish);
      • the protection of the employer’s trade secrets or confidential information; or
      • the competitive unfairness of allowing competition that adversely impacts the employer’s goodwill.13

Establishing that an employee is unique can be very difficult as demonstrated in a case before the New York Appellate Division First Department last year. In that case, Harris v. Patients Med., P.C.,14 a medical practice appealed a ruling that denied its motion for a preliminary injunction enjoining a former employee, a doctor, from breaching restrictive covenants in her employment agreement. The Appellate Division determined that the employer did not have a substantial likelihood of success on the merits of its claim. Specifically, the Court held the former employer had not shown that the restrictive covenants were necessary to protect its legitimate interests as it failed to establish that the doctor’s services were unique or extraordinary such that they gave the employee an unfair advantage over the employer.15 Similarly, in Vertical Sys. Analysis, Inc. v. Balzano,16 the First Department reasoned that the employee, an elevator inspector, did not provide unique or extraordinary services or have any access to trade secrets or propriety information that would require the enforcement of a non-solicitation provision.

2.  No-hire Provisions

A non-solicitation clause that applies to the solicitation of employees of a former employer or a previously owned company has been referred to by many courts as a non-recruitment or a no-hire provision. Improper conduct in this regard includes identifying employees to be recruited, direct or indirect solicitation of employees, and speaking to employees concerning how they would like to be compensated by the new employer.17

This commentator is not aware of a New York Court of Appeals case adjudicating whether a covenant not to solicit employees is enforceable.  However, both the Appellate Division Second Department and New York federal courts have stated that New York recognizes the enforceability of covenants not to solicit employees.18 Like other restrictive covenants, they are subject to a reasonableness analysis but are considered inherently more reasonable than a covenant not to compete.  The United States District Court for the Southern District of New York has gone as far as to say that these types of provisions can be viewed as prima facie enforceable when they are reasonable in scope and limited in duration.19

A relatively recent case in the Southern District of New York demonstrates how courts are willing to enforce no-hire provisions. In Oliver Wyman, Inc. v. Eielson,20  an employer brought an action against two former employees, alleging fraud and breach of contract in connection with the acquisition by the plaintiff of the former employees’ consulting business. The Court held that the non-recruitment clause in the employees’ employment contracts was no more restrictive than necessary to protect the former employer’s legitimate interest in protecting its client base.21 The Court reasoned that the no-hire clause was acceptable because of its narrow scope because it only prevented the poaching of former co-workers for actual, available employment opportunities in which the solicitor of those workers has an interest.22 Additionally, the Court held that the non-recruitment clause in the former employees’ employment contracts did not impose an undue hardship on the former employees.23

3.  “Garden Leave” Provisions

A “garden leave” provision is an extended notice provision that requires departing employees to give the company a certain period of advance notice when they intend to leave the company.24  It is a variation of a notice of termination provision and can be used as an alternative to or in addition to a traditional non-compete provision to restrict competition by departing employees.  Such a provision gives employers the option to pay the employee through the balance of the notice period and direct her or him not to come to work or perform services, giving the employees leave to “tend to their gardens” or pursue any other activity excluding other employment provided that the employee does not compete with her or his former employer.25 Extended notice provisions may be mutual but can also require that only the employee provide notice, with no similar obligation on the employer.26 Where mutual, these provisions without exception (to our knowledge) do not require such notice from employers where the employee is being terminated for cause.27


Richard B. Friedman
Richard Friedman PLLC

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1 Flatiron Health, Inc. v. Carson, 2020 WL 1320867, at 19 (S.D.N.Y. Mar. 20, 2020).
2 Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773, at 19 (E.D.N.Y. Mar. 9, 2020).
3 Id; See also King v. Marsh & McLennan Agency, LLC, 67 Misc. 3d 1203(A) (N.Y. Sup. Ct. 2020). KCG Holdings, Inc. v. Khandekar, 2020 WL 1189302, at 17 (S.D.N.Y. Mar. 12, 2020).
4 Good Energy, L.P. v. Kosachuk, 49 A.D.3d 331 (1st Dep’t 2008).
5 Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773, at 21.
6 Id.
7 4B N.Y.Prac., Com. Litig. In New York State Courts § 80:8 (4th ed.).
8 Id.
9 Contempo Communications, Inc. v. MJM Creative Services, Inc., 182 A.D.2d 351 (1st Dep’t 1992). Genesee Val. Trust Co. v. Waterford Group, LLC, 130 A.D.3d 1555, 1558 (2015).
10 King v. Marsh & McLennan Agency, LLC, 67 Misc. 3d 1203(A) (N.Y. Sup. Ct. 2020).
11 Id.
12 Id.
13 Flatiron Health, Inc. v. Carson, 2020 WL 1320867, at 21 (S.D.N.Y. Mar. 20, 2020).
14 Harris v. Patients Med., P.C., 93 N.Y.S.3d 299 (N.Y. App. Div. 2019).
15 Id.
16 Vertical Sys. Analysis, Inc. v. Balzano, 621, 97 N.Y.S.3d 467 (N.Y. App. Div. 2019).
17 Marsh USA Inc. v. Karasaki, 2008 Wl 4778239 (S.D.N.Y. 2008).
18 See Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773, at 23 (E.D.N.Y. Mar. 9, 2020); General Patent Corp. v. Wi-Lan Inc., 2011 WL 5845194 (S.D.N.Y. 2011).
19 General Patent Corp. v. Wi-Lan Inc., Isd.
20 Oliver Wyman, Inc. v. Eielson, 282 F. Supp. 3d 684, 695 (S.D.N.Y. 2017).
21 Id.
22 Id.
23 Id.
24 4B N.Y.Prac., Com. Litig. In New York State Courts § 80:10 (4th ed.).
25 Id.
26 Id.
27 Id.



Employer Best Practices for Conducting Sexual Harassment Investigations

A female mid-level employee walks into her employer’s Human Resources (“HR”) Department offices and states that she would like to file a sexual harassment complaint against a senior executive. The employee then lays out her story and describes her fears of retaliation from the executive. This situation can be very difficult for in-house counsel because they are presumably concerned about the well-being of all employees, promoting a suitable company culture, and providing a safe and positive environment which hopefully helps the company to thrive.

Given the seriousness of sexual harassment allegations, which has certainly been highlighted by the #MeToo Movement, it is obviously imperative that employers conduct thorough and impartial investigations into allegations of sexual harassment. In order to ensure a proper investigation occurs, employers should address the following issues, among others.

Who should conduct the investigation?

What is the proper scope?

How should the witness interview be conducted?

In what manner and to whom should the conclusions be communicated?

With proper procedures followed by capable HR personnel, in-house counsel, and/or outside counsel, employers can ensure that a fair investigation is conducted and reduce or eliminate the possibility of company liability for an improper investigation.

Who is an Appropriate Investigator?

Many employers utilize HR staff members or in-house counsel to conduct internal investigations due to their understanding of company policies and/or employment law. Although obviously cost-effective, this approach can eventually result in allegations of conflicts of interest because of the employment relationship between the employer and the employee-investigator. This is particularly true when a senior executive is the target of the investigation.

Employing outside counsel to conduct sexual harassment investigations is the safest way to proceed when the allegations are extremely serious and/or one or more senior executives are involved. Consideration should also be given to having outside counsel conduct an investigation when the complainant is a former employee to reduce or eliminate later allegations in the litigation that I believe is more likely to ensue under such circumstances that the investigation was flawed because the investigator was conflicted. Retaining outside counsel also allows in-house counsel and HR employees to focus on other meaningful workplace functions.

What is the Appropriate Scope of an Investigation?

Of course, the scope of the investigation depends on the nature of the complaint and may change as new facts come to light. That said, the investigator(s) must probe the credibility of the alleged harasser(s), victim, and witnesses and evaluate whether the company’s processes and practices for handling sexual harassment claims were followed. In addition, investigators should make recommendations if they believe (i) certain company processes or practices need to be revised, (ii) systemic problems exist, or (iii) an HR audit is warranted.

A preliminary investigation plan should include a description of known facts and specific issues to be explored, a list of possible witnesses as well as other individuals with relevant information, and known or possible documentary evidence. It should also contain a proposed timeline for completion of the investigation. Potentially relevant evidence includes records of prior complaints, witness interviews, personnel files, performance evaluations, compensation records, timekeeping records, emails and other electronically stored information, voicemails, audio/video recordings, employee notes and logs, and background checks. In determining the appropriate investigatory strategy, investigators should be mindful of the potentially disruptive and unnerving effect of a hard-nosed investigation into alleged employee misconduct.

How Should Witness Interviews Be Conducted?

At the outset of employee interviews, in-house or outside counsel must provide Upjohn warnings to ensure the integrity and confidentiality of employee interviews. In the landmark 1981 case Upjohn Co. v. United States, the United States Supreme Court found that a company’s attorney-client privilege protected communications between attorneys and a company’s employees regardless of their seniority and authority. The Court’s holding gave rise to the Upjohn Warning in which attorney investigators hired by a company inform employee interviewees that the attorney-client relationship exists only between the attorney and the employer. Failure to provide an Upjohn Warning has resulted in employee witnesses being afforded the right to claim the attorney-client privilege with respect to their communications with investigative counsel representing the company.

Another issue that sometimes arises is whether to allow employees being interviewed to have their personal counsel or another representative present. In order to protect the privacy rights of the persons involved, among other reasons, it is my view that employers should generally avoid allowing counsel or a representative to sit in on interviews. If it is permitted under unusual circumstances, employers should articulate guidelines in advance to prevent disruptions, questions, and responses made by an attorney on behalf of his or her client or a representative on behalf of his or her principal.

Although efforts should be made to ensure the confidentiality of information obtained from witness interviews, employers need to understand that relying on the propriety of an investigation as a defense in a litigation may eventually result in a waiver of the attorney-client privilege for that investigation.

Investigative Report

In many routine investigations, it is perfectly appropriate for in-house counsel or HR employees to speak separately with the complainant and the subject of the investigation, send separate confirmatory emails, and not prepare a formal report. However, if counsel believes that remedial or other actions may or will need to be taken, the target is a senior employee, and/or litigation is reasonably likely to ensue, a written report should be prepared absent extraordinary circumstances. When PowerPoint slides are used to make a presentation of the report, attendees, including Board members, should not be allowed to retain any slides because of possible litigation.


Of course, no single approach will suit all companies or all scenarios when sexual harassment allegations have been made so it is imperative for an employer to give careful consideration to what is appropriate given the particular circumstances. However, there are some universal guidelines I believe employers should follow when choosing an investigator. Employers should try to confirm that the investigator is:

  1. well-trained on proper investigation procedures;
  2. knowledgeable about employment and sexual harassment law and company policies;
  3. disinterested in the particular investigation even if an employee of the company at issue;
  4. a skilled interviewer who knows how to listen and when to probe to find relevant information; and
  5. has an acute eye for details since some may eventually prove to be important.

Investigators with these virtues, whether employed by the company or outside counsel, should be able to conduct competent investigations in even the most trying of circumstances. Finally, the form of any report should be governed by the employment status of the complainant(s), the nature of the allegations, and the seniority of the target(s) of the investigation.

Richard B. Friedman
Richard Friedman PLLC

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Sexual Harassment Legal Settlements: The Rules Have Changed Under the Tax Cuts and Jobs Act

Sexual Harassment Legal Settlements: The Rules Have Changed Under the Tax Cuts and Jobs Act

At the risk of stating the obvious, the #MeToo movement, in raising awareness about the traumatic experiences of sexual assault and harassment victims, has already begun to spur changes to our laws. This is readily apparent in Section 162(q) of the Tax Cuts and Jobs Act which disallows employers from deducting settlement payments and legal costs related to sexual harassment or abuse matters if the parties signed a settlement agreement with a confidentiality provision. It would appear that ensuring the confidentiality of a settlement now comes at a higher price to corporations which in the past would have deducted the settlement amount and the attorney’s fees related to that matter. However, as is often the case under the “law” of unintended consequences, this provision may prove detrimental to some claimants by causing companies to (i) challenge allegations and fight lawsuits alleging sexual harassment or sexual abuse rather than settle early if they don’t expect to be able to use the foregoing deductions because any settlement will be confidential and/or (ii) insist on paying lower amounts to settle confidentially, including in instances where claimants desire confidentiality because of the unavailability of these deductions.

What Does Section 162(q) Say?

New Internal Revenue Code Section 162(q) provides that, as of December 22, 2017, no deduction shall be allowed for:

” 1. any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or

2. attorney’s fees related to such a settlement or payment.”

This provision applies to payments made on or after December 22, 2017 even if the settlement agreement was signed prior to that date.

How Does It Change Existing Law?

Before Section 162(q) of the Internal Revenue Code was modified, employers could deduct the amounts paid as part of a confidential settlement along with all related legal costs as ordinary and necessary expenses incurred in carrying on their businesses. In forcing employers to choose between non-disclosure of a settlement payment and non-deductibility of the payment and related legal costs, the new section aims to deter settlement agreements containing non-disclosure provisions which have been wildly decried in the media as “hush money” payments that conceal the culpability of employers and thereby do not deter future sexual harassment in the workplace.

IRS Guidance is Needed

Because the IRS has yet to release guidance regarding Section 162(q), there are many unanswered questions, some of which are discussed below.

1. Unintended Consequences for Claimants

Section 162(q) clearly aims to benefit employees who have been the victims of sexual harassment; however, there are aspects of the statute that could end up hurting some of them. First, employees who receive settlements related to sexual harassment or abuse claims may themselves want the settlements to remain confidential out of fear that the publication of the settlement could negatively impact their personal life or future job prospects. Since Section 162(q) provides an incentive for an employer to not settle confidentially, an employee or former employee who desires nondisclosure now has less leverage and may be more likely to accept a lower settlement offer in return for confidentiality. Thus, early settlements may be less common and settlement amounts may be lower than in the past since such amounts and all related legal costs are no longer deductible.

Second, Section 162(q) does not on its face restrict only employers from deducting attorney’s fees. Therefore, it is at least conceivable, however absurd, that claimants could find themselves in a worse position financially than they were in prior to the adoption of the provision. Before Section 162(q) was amended, claimants could take an above-the-line tax deduction on the attorney’s fees they paid; thus, they were only taxed on the net portion of the settlement amount they received. Can claimants possibly be taxed on the entire amount of a settlement, i.e., more than they actually keep after taking into account attorney’s fees and costs which often comprise at least a third of the settlement amount? The far more reasonable position in my view is that, given the stated purpose of the legislation in the Conference Committee Report to disallow any deduction “for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement” (H. Rept. 115-466 at 279), claimants can still deduct attorney’s fees and therefore will only pay taxes on the net amount they receive. However, until the IRS issues clarifying guidelines, some claimants may seek to have employers cover their possible additional tax liability which could present a stumbling block to a settlement.

2. Ambiguity Surrounding the Term “Related To”

Both provisions of 162(q) apply to settlements “related to” sexual harassment or abuse. This is problematic because many plaintiffs allege sexual harassment or abuse in addition to multiple other claims, such as race and gender discrimination claims. In drafting settlement agreements, employers almost always settle all claims simultaneously and do not distinguish between the sexual claims and other allegations. It is now unclear how employers should approach the settlement of multiple claims. Should they insist on separate settlement agreements for the deductible and non-deductible claims? In doing so, can employers offset the tax consequences of a nondeductible settlement by allocating larger amounts to settlements for other, non-sexual related claims? Absent clarifying guidance from the IRS, that seems very likely to occur in my view and, indeed, is probably already being done.

This ambiguity also applies to the provision regarding attorney’s fees. Where there are multiple claims against an employer, its attorneys conduct research and render other legal services vis-a-vis all claims, not only those which relate to sexual harassment or abuse. How should the fees associated with attorney time be allocated under Section 162(q)? Additionally, attorney’s fees are nondeductible only insofar as they relate to “settlement or payment.” Is the investigation of, or response to, a complaint of sexual harassment or abuse sufficiently related to “settlement or payment” to fall within the provision’s purview, or would attorney’s fees related to such legal services be deductible? The answer to these and other questions must await guidance from the IRS and, inevitably in some cases, the United States Tax Court. In the interim, companies confronted with these issues would be well advised to work with counsel who handle these types of matters regularly.

Finally, companies often insist in settlement agreements on general releases of all claims, including those of a sexual nature. Would such a release in a confidential settlement of a matter where there was no allegation of sexual harassment or abuse trigger Section 162(q)? That seems highly unlikely. Nonetheless, companies should give careful consideration before entering into a settlement agreement that contains explicit references to sexual harassment or abuse claims where no such claims were alleged.

Richard B. Friedman
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Employer Social Media Practices/Policies and the NLRA by Richard Friedman

Employer Social Media Practices/Policies and the NLRA

In recent years, as the use of social media has exploded, the National Labor Relations Board (“NLRB”) has received allegations of improper discipline of employees for social media postings as well as complaints condemning employer social networking policies. We briefly discuss a few of those decisions below.

In what came to be known as “the first Facebook case,” American Medical Response of Connecticut, Inc., No. 34-CA-12576, an employee criticized her supervisor in a Facebook post for denying her Union representation, which triggered responses from co-workers voicing their support. The employee was suspended the following day and later discharged. The NLRB alleged in a complaint that the employer’s internet and social media policies were overly broad and violated Section 7 of the National Labor Relations Act (the “NLRA” or “Act”), which gives employees the right “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The NLRB’s complaint also alleged that the employee was unlawfully terminated for engaging in protected concerted activity when she posted on Facebook. The NLRB stressed that employees must be permitted to discuss the terms and conditions of their employment with co-workers. The NLRB asserted that the employer violated the NLRA when it discharged the employee for posting comments on Facebook that prompted support from other employees. The case settled when the employer agreed to substantially narrow the scope of its social media policies.

The NLRB addressed whether an employee could be fired for selecting the “like” option on a Facebook post in Three D, LLC d/b/a Triple Play Sports Bar and Grille, 361 NLRB No. 31. The NLRB found that the employer, a bar and restaurant, violated Section 8(a)(1) of the NLRA by unlawfully discharging two employees for their protected, concerted participation in a Facebook discussion in which they criticized perceived errors in their employer’s tax withholding calculations because such communications constituted concerted activities protected by the NLRA.

One of the discharged employees was terminated for “liking” a Facebook post by a former employee containing the discussion. Another employee used an expletive to describe the company co-owner. In finding the terminations unlawful, the NLRB stated that the test set out in Atlantic Steel, 245 NLRB 814, by which the Board determines whether an employee loses the Act’s protection for contemptuous workplace conduct that occurs during an otherwise protected activity, is not well-suited to address statements involving employees’ off-duty, off-site use of social media to communicate with other employees. Under the Atlantic Steel test, the Board balances the following four factors to determine whether an employee loses the Act’s protection:

1. the place of the discussion;
2. the subject matter of the discussion;
3. the nature of the employee’s outburst; and
4. whether the outburst was provoked by the employer’s unfair labor practices.

The Board stated that the first factor alone supported its conclusion that the Atlantic Steel framework should not be applied to the type of employee activities in this case.

Instead, the NLRB applied the tests articulated by the U.S. Supreme Court in the Jefferson Standard (346 U.S. 464(1953)) and Linn (383 U.S. 53 (1966)) cases to the employees’ comments. In Jefferson Standard, the Court had upheld the discharge of employees who publicly attacked the quality of their employer’s product and practices without tying such criticisms to a pending labor controversy. In Linn, the Court had limited state law remedies for defamation during a union-organizing campaign to those situations where the plaintiff could show that “the defamatory statements were circulated with malice” and caused damage. Linn v. Plant Guards Local, 383 U.S. at 64-65. Here, the NLRB concluded that the employees’ statements were neither disloyal nor defamatory under those standards because they neither disparaged the employer’s products or services or undermined its reputation and therefore did not lose the Act’s protection.

The Board also held that the company’s internet/blogging policy, which stated that “engaging in inappropriate discussions about the company, management, and/or co-workers” might constitute a violation of the law “and is subject to disciplinary action, up to and including termination of employment,” was overly broad and unlawfully restricted employees in the exercise of their rights under the Act.

The NLRB has also found that employees can lose protection under the NLRA if their conduct advocates insubordination. In Richmond District Neighborhood Center, 361 NLRB No. 74, the NLRB held that employees who engaged in specific discussions of planned insubordination on Facebook lost the protection they otherwise would have enjoyed under the NLRA. After two employees detailed their plans to disrupt the workplace and flaunted their disregard for their employer’s policies and procedures on Facebook, the discussions were reported by a co-worker who took screenshots of their exchange. Although the NLRB found the employees’ Facebook posts to be a concerted activity, the Board concluded that the employees had lost the protection of the NLRA since their statements advocated insubordination. The NLRB also considered the protracted length of the exchange between the employees and the detailed nature of the specific acts they advocated when determining that their statements had lost protection.

Richard B. Friedman
Richard Friedman PLLC
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FAX: 212-840-8560
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Non-compete Agreements Under New York Law by Richard Friedman

Non-compete Agreements Under New York Law

Many employers try to limit former employees’ actions at the conclusion of the employment relationship through restrictive covenants. A restrictive covenant is a contractual agreement restricting the post-employment activities of a former employee for a fixed period after the termination of an employment relationship in order to protect the employer’s legitimate business interests.

A. Protectable Interests

Non-compete agreements offer the widest range of protection for employers by limiting a prior employee’s ability to work for a competitor after the employment relationship ends. However, this type of restrictive covenant is often the most difficult to enforce and is generally disfavored in New York. New York courts will enforce non-compete provisions only to the extent necessary to protect an employer’s legitimate interests and where they are reasonable in time and geographic area. Such courts consider the protection of the following kinds of information to be legitimate protectable interests:

1) trade secrets;

2) confidential customer relationships; and

3) confidential customer information.

For example, in Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 71 (2d Cir. 1999), the court noted that an employer has sufficient interest in retaining its current customers to support a covenant not to compete where the employee’s relationship with the customers is such that there is a substantial risk that the employee may be able to divert all or part of the business.

B. Temporal and Geographic Restrictions

New York courts have repeatedly held that temporal restrictions of six months or less are reasonable. See Ticor Title Ins. Co. v. Cohen, 173 F.3d at 70 (2d Cir. 1999); Natsource LLC, 151 F.Supp.2d at 470-71 (three-month non-compete). However, courts have also enforced non-competes of three years or more, usually where geography is limited. In Novendstern v. Mount Kisco Med. Grp., 177 A.D.2d 623, 576 N.Y.S.2d 329 (1991), the court found that a covenant restricting a physician from competing with his previous employer was enforceable because the prohibition on the physician’s practicing in his specialties for three years was in a limited geographic area.

To determine whether a non-compete provision is reasonable in geographic scope, courts in New York examine the particular facts and circumstances of each case. For example, in Natsource LLC v. Paribello, 151 F.Supp.2d 465, 471-72 (S.D.N.Y.2001), the court was willing to enforce very broad geographic restrictions on employees where the “nature of the business requires that the restriction be unlimited in geographic scope,” so long as the duration of those restrictions was short. (Emphasis added). However, in Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 813 F. Supp. 2d 489 (S.D.N.Y. 2011), the court held that the non-compete provision in a fitness center operator’s employment agreement with prior employees, which prohibited employees from working at a competitor center anywhere in world for ten years following employment at center, was unenforceable since it was unreasonable in terms of duration and geographic scope.

C. Consideration

New York courts have also examined whether there was sufficient consideration, whether the agreement was incidental to the sale of a business, and whether an employee was preparing to compete to determine if a non-compete was reasonable. Such courts have found that future employment constitutes sufficient consideration to support a covenant not to compete. See Poller v. BioScrip, Inc., 974 F. Supp. 2d 204 (S.D.N.Y. 2013) (holding that “the fact that a restrictive covenant agreement is a condition of future employment does not automatically render such an agreement coercive and unenforceable”). Similarly, in Ikon Office Solutions v. Leichtnam, 2003 U.S. Dist. LEXIS 1469, *1, 2003 WL 251954 (W.D.N.Y. Jan. 3, 2003), the court found that the non-compete covenant was enforceable because the employee was an at-will employee who received continued employment as consideration. Moreover, financial benefits and an employee’s receipt of intangibles such as knowledge, skill, or professional status, are also sufficient consideration to support a non-compete provision under New York law. See Arthur Young & Co. v. Galasso, 142 Misc. 2d 738, 741 (Sup. Ct. N.Y. County 1989).

D. Selling a Business and Preparing to Compete

New York courts are most likely to enforce non-compete agreements that are incidental to the sale of business. See Mohawk Maint. Co. v. Kessler, 52 N.Y.2d 276 (1981) (stating that courts give covenants not to compete made in connection with the sale of a business and its accompanying goodwill “full effect when they are not unduly burdensome”).

New York courts have held that an employee preparing to compete violates a non-compete provision where affirmative steps have been taken that would give the individual a head start on competing once the restricted period ends. For example, in World Auto Parts, Inc. v. Labenski, 217 A.D.2d 940 (4th Dep’t 1995), the court found that conduct such as making personal loans to the principal owners of competitors and divulging to competitors price information acquired while working with the former employer constituted preparatory behavior that violated the non-compete agreement. However, in some instances, employees may prepare to compete prior to their departure provided that they do not use their employers’ time, facilities or proprietary secrets to do so. See Stork H & E Turbo Blading, Inc. v. Berry, 932 N.Y.S.2d 763 (2011).

Of course, we are available to assist in drafting, negotiating, and, if necessary, litigating non-compete and other restrictive covenant agreements. Some of the negotiated and litigated employment-related matters that our lawyers have handled in recent years have involved fiduciary duty claims, allegations of possible officer and/or employee misconduct, the faithless servant doctrine, wrongful discharge claims, confidentiality provisions in employment and severance agreements, trade secrets, and related matters.  One of Richard Friedman’s most noteworthy trial victories in the New York County Commercial Division, on whose Advisory Committee he serves with the nine judges of that court as one of about fifteen judicially appointed private practitioners, is the subject of a feature American Lawyer article that is available upon request via email at

Richard B. Friedman
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