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By Stephen Lott

Seyfarth Synopsis: Trademark lawyers are often asked: “What’s the difference between a trademark and a service mark?” In general, a trademark refers to a brand name used in connection with goods, while a service mark is one that is used in connection with the provision of services.  The services must be provided for the benefit of someone other than the mark owner. But the Trademark Trial and Appeal Board (“TTAB”) ruled in a recent precedential decision that operating an online retail store under a particular brand name can qualify as use of a service mark, even where the owner only sells its own branded products via the online store. What separately registrable service(s) is the seller providing merely by selling its own products on its website? The TTAB’s decision seeks to answer that question.

In Blizzard Entertainment, Inc. v. Ava Labs, Inc., Opp. No. 91285851 (TTAB July 18, 2024), opposer Blizzard Entertainment sought to prevent registration of applicant Ava Labs’ trademark application for BLIZZARD for various business services, asserting likelihood of confusion with Blizzard’s prior registrations for BLIZZARD and BLIZZARD ENTERTAINMENT for online retail store and mail order services. In response, Ava asserted a counterclaim for cancellation of Blizzard’s registrations on the basis of nonuse, arguing that Blizzard only ever sold its own products via its e-commerce website. Such use, Ava argued, does not constitute use of a service mark because services must be provided primarily for the benefit of others, and selling one’s own products primarily benefits the seller. The Board disagreed.

In reaching its conclusion, the Board noted that, in order to qualify as a service under U.S. trademark law, an activity must be real, it must be performed for the benefit of someone other than the seller, and it must be qualitatively different from anything necessarily done in connection with the sale of the seller’s goods (i.e., it cannot simply be ancillary to the sale of the products). With respect to the second prong, the Board added that the relevant question is who primarily benefits from the activity. The Board ultimately concluded that Blizzard’s provision of an e-commerce website primarily benefited consumers, even though Blizzard was only selling its own products on the site:

“[O]nline retail store and mail order activities featuring one’s own goods primarily benefit consumers in that the activity provides a central location to find, examine, and purchase various goods; and this is true even though the retailer derives the benefit of selling its own goods”

This ruling would appear to cut against the traditional wisdom that “[t]he sale of one’s own product does not constitute a ‘service’ within the meaning of the Lanham Act.” McCarthy on Trademarks and Unfair Competition § 19:89 (citing IdeasOne, Inc. v. Nationwide Better Health, Inc., 89 USPQ2d 1952 (TTAB 2009)). In other words, activities by a seller that are ancillary to the sale of goods (e.g. advertising one’s own products) have generally not been considered to be separately registrable services. Moreover, even assuming arguendo that providing an e-commerce site to sell one’s own products provides a benefit to the consumer, it is unclear from the Board’s decision how the benefit to the consumer is greater than the benefit to the seller, i.e. how providing an e-commerce site “primarily” benefits the consumer rather than the seller.

In any event, practitioners and brand owners should take this decision into consideration when determining how to best protect their brands. For example, if a maker of toy cars sells them under the hypothetical brand ABC, it would likely be advisable to register ABC as a trademark for “toy cars” in International Class 28. Following the Board’s Blizzard decision, if that same toy maker were to set up an e-commerce website to sell its ABC toy cars, the seller may consider separately registering ABC as a service mark for “online retail services featuring toy cars” in International Class 35. While it is debatable how much additional protection the Cl. 35 registration would actually provide, one could argue that an additional registration may increase the chances that a trademark examiner will cite the brand owner’s mark as a basis for refusing registration of a confusingly similar third-party mark, thereby potentially allowing the brand owner to avoid having to file an opposition. Moreover, trademark registrations are assets, and such assets of course affect valuations in the event of acquisitions, licensing agreements, and other corporate transactions.

Speakers – Kathleen McConnell, Gina Ferrari, and Vincent Smolczynski

About the Program: Do you operate a website in California? Are you considering a cookies banner? Does your website terms compel arbitration? Then you need to know about the latest in California Privacy Litigation and Compliance. 

Join us for an insightful webinar on navigating the complexities of CIPA (California Invasion of Privacy Act) compliance, focusing on website and cookie banner requirements. Our expert speakers will provide practical insights and real-world examples to help you understand and navigate CIPA requirements. Don’t miss this opportunity to enhance your knowledge and ensure your digital compliance efforts are on the right track.

Topics covered, include:

  • A historical and updated analysis of the scope of CIPA claims and defenses
  • Understanding the intersection of CIPA and other privacy regulations
  • Practical and technical implementation guidance on how to prove the defense of consent, including guidance on using cookies banners
  • A historical and updated analysis on effective arbitration provisions that avoid the pitfalls attendant to mass arbitration

At 1:00 PM, CST; Noon, EST.

Cost – There is no cost to attend, but registration is required.

REGISTER HERE

If you have any questions, please contact Brenda Begini at bbegini@seyfarth.com and reference this event.

Learn more about our Privacy & Cybersecurity practice.

To comply with State CLE Requirements, CLE forms requesting credit in IL or CA must be received before the end of the month in which the program took place. Credit will not be issued for forms received after such date. For all other jurisdictions forms must be submitted within 10 business days of the program taking place or we will not be able to process the request.

Our live programming is accredited for CLE in CA, IL, and NY (for both newly admitted and experienced).  Credit will be applied as requested, but cannot be guaranteed for TX, NJ, GA, NC and WA. The following jurisdictions may accept reciprocal credit with our accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, AR, CT, HI and ME. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used for self-application. CLE decisions are made by each local board, and can take up to 12 weeks to process. If you have questions about jurisdictions, please email CLE@seyfarth.com.

Please note that programming under 60 minutes of CLE content is not eligible for credit in GA. programs that are not open to the public are not eligible for credit in NC.

Presenters: Daniel Hart, Daniel Whang, and Sierra Chinn-Liu

Navigating the complexities of trade secret enforcement often involves more than just traditional litigation. Join us for a compelling webinar in our 2024 Trade Secrets Webinar Series, where our panel of Seyfarth attorneys will delve into the strategic advantages of using alternative dispute resolution (ADR) mechanisms to protect and enforce your trade secrets.

Key Discussion Points:

  • The various ADR methods available for trade secret disputes: Understand the nuances of mediation, arbitration, and other ADR processes, how they differ from traditional litigation, and the pros and cons of alternative methods of dispute resolution.
  • Best practices for leveraging mediation and arbitration: Receive practical advice on when and how to use these methods effectively, including tips on selecting mediators and arbitrators with the right expertise.
  • Key considerations for drafting ADR provisions in agreements: Understand the considerations for drafting ADR clauses, how they interact with restrictive covenant agreements, and their impact on trade secret protection.

Who Should Attend: In-house counsel, Legal professionals involved in trade secret protection and arbitration programs, HR and compliance officers, and Business leaders interested in safeguarding intellectual property.

Cost – There is no cost to attend, but registration is required.

REGISTER HERE

Thursday, August 29, 2024
1:00 p.m. to 2:00 p.m. Eastern
12:00 p.m. to 1:00 p.m. Central
11:00 a.m. to 12:00 p.m. Mountain
10:00 a.m. to 11:00 a.m. Pacific

By Trevor Tullius, Steven A. Richman, and Shamim Mohandessi

Seyfarth Synopsis: Net Asset Value (NAV)-based financing facilities (“NAV Facilities”) continue to proliferate in private equity. In response, the Institutional Limited Partners Association (ILPA) released comprehensive new guidance making the case for transparency, governance, and risk management to be fundamental considerations in the incurrence and deployment of NAV Facilities. Since the onset of the COVID pandemic, NAV Facilities have gained traction among private equity strategies as a source of liquidity and an additional resource for General Partners (“GPs”) to manage indebtedness, support portfolio companies, or make early distributions to Limited Partners (“LPs”).

This growing reliance on NAV Facilities raises significant concerns for the LP community, particularly in light of limited transparency and explicit governance within many existing Limited Partnership Agreements (“LPAs”).

In an effort to promote a more balanced and informed relationship between GPs and LPs, ILPA’s guidance seeks to address these issues by outlining best practices for the use, disclosure, and documentation of NAV Facilities.

This alert provides an overview of the key recommendations and considerations from ILPA’s guidance, emphasizing the need for proactive engagement and legal clarity in the incurrence and deployment of NAV Facilities within private equity funds.

Key Takeaways:

  1. Growing Prevalence and Market Impact: The use of NAV Facilities is expanding, with the market projected to grow from $100 billion to $600 billion by 2030. These facilities, secured by the underlying value of fund investments, are used to manage liquidity, support portfolio companies, or provide early distributions to investors.
  2. Transparency and Disclosure: ILPA emphasizes the need for greater transparency from General Partners. The guidance recommends that Limited Partners be informed about the use of NAV-based facilities, including their terms, costs, proposed use cases, LP obligations, and associated risks. This is crucial for LPs to assess the impact on fund performance and to make informed decisions.
  3. Synthetic Performance: ILPA identifies the perverse incentives for a GP to use NAV-based facilities to fund performance (namely internal rate of return (“IRR”) and distributions to paid-in capital (“DPI”) calculations) which can be synthetically improved by the liquidity generated through NAV Facilities. ILPA notes that distributions from NAV Facilities are often recallable, creating an environment which could result in LPs paying for the interest expense of a NAV Facility which is later recalled.
  4. Governance and Legal Considerations: ILPA urges GPs to seek explicit consent from LP Advisory Committees (“LPACs”) before implementing NAV Facilities, particularly when the proceeds of a NAV Facility will be used to generate DPI. The guidance also advocates for updated legal documentation in Limited Partnership Agreements to set clear boundaries on the permissible use of NAV Facilities.
  5. Recommended Practices: GPs are encouraged to engage proactively with LPs, disclosing the rationale, size, structure, and economic terms of any NAV facilities. The guidance also suggests that NAV facilities should be considered fund-level leverage and included within borrowing limitations. Importantly, ILPA has provided template Q&A forms for this purpose as well as suggested questions to be proposed by LPs.

This updated guidance aims to foster a more transparent and collaborative approach between GPs and LPs, ensuring that the use of NAV Facilities aligns with the best interests of all parties involved. While innovation in private investment funds is a natural byproduct of the evolving market and industry (and hopefully used to generate improved LP returns), NAV Facilities present a unique set of challenges in light of their impact on a fund’s risk profile. Their potential use for a variety of reasons may be viewed by LPs as welcome and accretive additions to the fund’s investment program, while others may view them otherwise.

Whether or not LPs are in favor of or neutral to NAV Facilities, best practices dictate that LPs at least be aware of the issue so they can make informed decisions when proceeding through the legal diligence process with a fund manager.

By Paul Yovanic and Michael D. Jacobsen

Seyfarth Synopsis: Earlier this year, we reported that the Illinois Senate passed Senate Bill 2979 with a vote of 46 to 13, and the Illinois House of Representatives passed Senate Bill 2979 with a vote 81 to 30. This bill addressed concerns arising from recent legal interpretations of the Illinois Biometric Information Privacy Act (“BIPA,” 740 ILCS 14/ et seq.), particularly following the Illinois Supreme Court’s 2023 decision in Cothron v. White Castle System Inc., in which the Court held that a claim under BIPA accrues each time that an individual’s biometric information or identifier is captured or collected.

Last Friday, after nearly a three-month wait, Governor J.B. Pritzker signed Senate Bill 2979 into law. This marks the first ever amendment to BIPA in its 16-year history.

Before the amendment, BIPA allowed aggrieved individuals to claim $1,000 or actual damages for “each” negligent violation, and $5,000 or actual damages for “each” reckless or intentional violation. In Cothron, the Court held that “each” violation under the statute is a separate claim, which led some plaintiffs’ attorneys to pursue a “per scan” damages theory whereby plaintiffs would purport to seek $1,000 or $5,000 for each scan of their biometric information or identifiers. Recognizing the potential for excessive statutory damages under this theory, the Court urged the Illinois legislature to take action, and the legislature responded with this significant amendment.

The amendment, which took effect on August 2, 2024, provides that an aggrieved person may recover for only one statutory violation under Sections 15(b) and 15(d). Specifically, the changes to BIPA’s damages provisions are as follows:

(b) For purposes of subsection (b) of Section 15, a private entity that, in more than one instance, collects, captures, purchases, receives through trade, or otherwise obtains the same biometric identifier or biometric information from the same person using the same method of collection in violation of subsection (b) of Section 15 has committed a single violation of subsection (b) of Section 15 for which the aggrieved person is entitled to, at most, one recovery under this Section.

(c) For purposes of subsection (d) of Section 15, a private entity that, in more than one instance, discloses, rediscloses, or otherwise disseminates the same biometric identifier or biometric information from the same person to the same recipient using the same method of collection in violation of subsection (d) of Section 15 has committed a single violation of subsection (d) of Section 15 for which the aggrieved person is entitled to, at most, one recovery under this Section regardless of the number of times the private entity disclosed, redisclosed, or otherwise disseminated the same biometric identifier or biometric information of the same person to the same recipient.

740 ILCS 14/25(b) and (c).

Notably, as amended, BIPA further suggests now that an aggrieved person cannot recover separate statutory amounts for violations of Section 15(b) and Section 15(d). Instead, each amendment explicitly states that an aggrieved individual is entitled to “a single violation … of Section 15 for which the aggrieved individual is entitled to, at most, one recovery under this Section …” Id. (emphasis added). In other words, although the amendment acknowledges that Section 15 includes subsections 15(b) and 15(d) as distinct subsections, its language nonetheless could be read to state that an individual may only recover for a single violation of Section 15 as a whole, regardless of which subsection is violated.

The amendment also expressly includes an “electronic signature” as a permissible means of a “written release,” as defined under the statute. Prior to this amendment, it was unclear whether an electronic signature was a proper means for affixing signature under the statute. Although electronic signatures to BIPA releases were not subject to frequent challenges by the plaintiffs’ bar, this aspect of the amendment provides additional clarity that should be welcome to Illinois employers and other businesses.

While the amendment is unlikely to halt BIPA filings entirely, they will mitigate the weaponization by some plaintiffs’ attorneys who viewed Cothron as their green light to pursue a per-scan damages theory, which could have exposed Illinois businesses to tens or even hundreds of millions of dollars in damages for even the smallest of putative classes. Until now, businesses were left to rely on the discretion of trial and appellate courts to keep this theory in check; with the amendment, the statute accomplishes that unequivocally. The amendment also prevents plaintiffs from seeking separate damages for each subsection under Section 15, thereby rebuffing another tactic for increasing damages that other plaintiffs’ counsel attempted to utilize in the alternative.   

If you have any questions about how this BIPA amendment may impact your business practices, please do not hesitate to contact the authors or your trusted Seyfarth Shaw advisor.

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By Arnold E. Brown, II, Erica L. Bakies and Melissa A.Passman

Seyfarth Synopsis: On July 18, 2024, the U.S. Dept. of Commerce, Bureau of Industry and Security (BIS) published a new interim final rule (the “Interim Final Rule”) entitled “Standards-Related Activities and the Export Administration Regulations,” modifying the “Standards Activity Exception” to the U.S. Entity List rules. On July 24, 2024, BIS sent a correction to this Interim Final Rule to add back certain text from the Export Administration Regulations (“EAR”) that was erroneously deleted.

The Interim Final Rule revises the scope and terms used to describe “standards-related activities” that are subject to the EAR. This rule is designed to ensure that export controls and associated compliance concerns do not impede the participation and leadership of U.S. companies in legitimate standards-related activities. The Interim Final Rule became effective on July 18, 2024. It was published with a request for comments.

Purpose and Overview

The new Interim Final Rule is a step towards allowing companies on the U.S. Entity List to participate more fully in U.S.-based standards organizations by revising the terms and scope of “standards-related activities” subject to the EAR. This is done with the aim of ensuring that export controls do not hinder the participation and leadership of U.S. companies in legitimate standards-related activities and give foreign entities the ability to develop and promote their own standards.

Broadly speaking, the Interim Final Rule accomplishes the following: (i) revises and clarifies the scope of what is considered “standards-related activities”; (ii) provides that specified “technology” and “software” are not subject to the EAR when released for standards-related activities; (iii) clarifies that the rule applies to activities of a standards organization that take place after the standard is published, for example, plug-fests; (iv) permits companies on the U.S. Entity List to engage more fully in U.S.-based standards organizations; and (v) adds specific licensing changes to streamline the process and provides clarity for companies seeking to participate in standards development. In addition, BIS clarified what it means to “publish” a standard, acknowledging that when a standards organization releases a standard to its members and membership is open to any member of the interested public and the associated dues could be paid by any member of the interested public, then a standard can be said to be “published”.

Expansion of the “Standards-Related Activities” Exception

In September 2022, BIS first published an interim final rule expanding the definition of “standards-related activities.” Comments received at the time of publication expressed the need for further expansion of the definition as well as concerns that U.S. companies would continue to be hindered without an expansion of the definition. By publishing the Interim Final Rule, BIS is amending the EAR to ensure that export controls and associated compliance concerns do not continue to impede or jeopardize U.S. participation and leadership in legitimate standards-related activities. Under the new Interim Final Rule, BIS determined that “standards-related activities” are no longer subject to the EAR as long as the “release” of the “software” or “technology” during these activities meets the criteria contained in revised § 734.10 of the EAR.

The conditions in § 734.10(b)(2) further clarify that activities that occur after the publication of a standard are included in the definition of “standards-related activity” – i.e., a “standards-related activity” occurring specific to an already “published” standard is included in the authorization. So, for example, plugfests and interoperability testing that takes place after a specification is published is clarified to be “standards-related activity.” Pursuant to the revised § 734.10(b)(2), the “standards-related activity” must be either for a “published” standard or occurs with the intent that the resulting standard will be “published.”

In addition, BIS, through a series of responses to questions that have been asked regarding the existing rules, confirmed that the “standards-related activities” exception already explicitly includes the exchange of technical data in the conformity process provided it is for the purpose of standards-development activities. Another question that BIS appears to have answered relates to whether a specification that is published to its members only can be considered “published” under the EAR. BIS has confirmed that, so long as any member of the interested public could pay the associated membership dues and become a member if they so desired, the cost of the membership will not impact the determination that a release to members counts as being “published” for purposes of the EAR.

As a result, under the Interim Final Rule the standards-related activity exception covers a broader range of activities. Ultimately, BIS recognizes the importance of this exception as essential to the free exchange of information that will allow private sector organizations to remain competitive in the global landscape, which has the corresponding result of fostering global participation in standards development. However, if your organization is involved in some activities that will not fall under the definition of “standards-related activities” as newly clarified by BIS, then your organization should consider whether your existing policies are sufficient to account for these rules or, if not, how your organization may need to segregate activities and manage member access should your organization currently have or contemplate permitting members that are currently on the U.S. Entity List to participate.

Recommendations for Standards Organizations

Many standards organizations have developed official or unofficial policies for meeting their legal obligations under the U.S. export control regulations relating to membership and member participation, including monitoring the U.S. Entity List for additional entries. Under the 2024 Interim Final Rule, the extent to which a standards organization will need to continue to monitor the U.S. Entity List will depend upon the activities of the organization and the type of materials exchanged within the group. However, even if the U.S. Entity List is not an immediate issue for a particular standards organization, it should strongly consider continuing to maintain the best practice of having a restricted party screening policy tailored to the organization’s activities, given that U.S. economic sanctions and export controls apply strict liability. For example, even though entities that traditionally participate in standards development are rarely placed on the U.S. Department of the Treasury’s Specially Designated Nationals and Blocked Persons List (SDN List), it does occur from time to time. U.S. persons, including corporations, are prohibited from engaging in any business with entities on the SDN List. In addition, there are other restricted party lists that the U.S. maintains that could impact standards organizations. We recommend that you consult with legal counsel regarding how to tailor your organization’s policies and procedures in light of this Interim Final Rule and in general to remain in compliance with U.S. economic sanctions and export control laws.

Additional Actions

We will monitor the situation, including whether any comments are submitted to BIS for this Interim Final Rule, and, if there are additional areas we see for potential clarification, we may provide more information to clients and/or submit comments on behalf of clients.

By Cat Johns and Dawn Mertineit 

Seyfarth Synopsis: The ongoing battle between DraftKings Inc. and its former executive, Michael Hermalyn, remains contentious, with the District of Massachusetts’ decision to enforce Hermalyn’s non-compete now appealed and argued to the First Circuit.

Background

DraftKings, a Boston-based online sports and gaming platform, employed Hermalyn as a Senior Vice President. He resigned in February 2024, consummating negotiations with DraftKings’ direct competitor, Fanatics, to take up a near-identical role there. However, Hermalyn’s restrictive covenants with DraftKings directly prohibit, among other things, his acceptance of such a role. The agreements also provide that they are governed by Massachusetts law. Perhaps because of this, in early 2024, Hermalyn worked to transition his residence to California.

DraftKings alleges Hermalyn took with him “keys to the kingdom”-level documents, including a spreadsheet of hundreds of business partners and a playbook of DraftKings’s operations for highly valued clients. The company contends Hermalyn’s transfer to Fanatics and moves toward California residency were part of a concerted scheme to misappropriate its confidential information, poach its employees, and escape liability through California’s stringent ban on non-competes.

The case involves competing litigations: Hermalyn filed suit to nullify his restrictive covenants in California state court in Los Angeles while DraftKings successfully moved for injunctive relief to enforce them in Massachusetts federal court.

Choice of Law Battle

Procedural disputes have kept the California action relatively slow-moving. However, the Court likely must examine the recently enacted § 16600.5 of the California Business and Professions Code. Section 16600.5, aimed at strengthening California’s already stringent non-compete ban, voids non-compete agreements “regardless of where and when the contract was signed.” Prior California law already allowed most workers who primarily reside and work in California to void provisions that would require the worker to adjudicate a non-compete dispute out-of-state (although there are some exceptions). See Cal. Labor Code § 925. However, California courts have held that § 925 does not control cases whose operative facts arose outside of California or claims by plaintiffs who did not primarily reside and work in California at the relevant time.

Though the language of § 1660.5 appears unambiguous, whether that law can actually pack as significant a punch as intended is unclear, as non-compete disputes like this one often involve a complex array of choice-of-law and -forum questions. Courts have not yet addressed whether California can actually regulate a contract negotiated in, performed in, and governed by the law of another state with minimal, if any, connection to California (at least until an individual decides to decamp to California for a new employer), and the new law raises questions of Constitutional concerns as well as comity concerns. Yet Hermalyn’s success rises and falls on whether he can establish that California’s anti-non-compete policy should overtake Massachusetts’ business protections, even when a Massachusetts business contracted with an (originally Massachusetts-based) employee to select Massachusetts as the governing law.

The First Circuit appeared skeptical of Hermalyn’s argument for applying California law.[1] For instance, Judge O. Rogeriee Thompson pointedly noted: “It’s not clear to me why California’s policy concerns have greater import than Massachusetts’s.” Likewise, Judge William Kayatta questioned the possible precedent set in invalidating the non-compete when the vast majority of states allow such agreements in certain circumstances, asking whether all of these states “must create an exception that says you can compete if you move to California.” DraftKings’ counsel seized on a similar argument, contending a decision in favor of Hermalyn would invite gamesmanship to evade obligations imposed in Massachusetts. He described Hermalyn’s conduct as “egregious” and this case as being a “paradigmatic” example “for why Massachusetts businesses need protection from this sort of thing.” DraftKings’ counsel further argued that the two states are “coequal sovereigns in our system and each has passed a statute that reflects the considered policy judgments of their respective legislatures,” and that there is “no basis to say that California’s law trumps Massachusetts’s law simply because California feels more passionately about these issues.”

The First Circuit thus appears poised to reject Hermalyn’s arguments and affirm enforcement of the non-compete. If accurate, the California court will have to consider whether it can somehow take a differing approach. As yet, while the Los Angeles Superior Court has (unsurprisingly) stated Hermalyn’s case would likely prevail under California law, it denied Hermalyn’s request for an injunction, emphasizing that doing so would “have the effect of enjoining the proceedings in the Massachusetts case.” Such a decision, the Court noted, would “require[] an exceptional circumstance that outweighs the threat to judicial restraint and comity principles.” It thus remains to be seen how the California court will ultimately rule (especially if the First Circuit affirms the trial court’s injunction prohibiting Hermalyn’s role with Fanatics), and what the impact will be of two potentially conflicting decisions on the applicability and enforceability of § 16600.5.

Conclusion

Hermalyn’s odds do not appear great in the First Circuit. DraftKings’ decision to swiftly move for relief in its homebase, where non-competes remain valid if they meet certain requirements, has thus far preserved Hermalyn’s obligations. However, the California action remains active, and California has continued to bolster its non-compete ban. While both the state and federal actions here have noted Hermalyn’s argument risks judicial overstep, it remains undecided whether or not California can statutorily void contracts made out of state. Dueling judgments may make this litigation the appropriate test case for a higher court ruling on California’s ability to effectively invalidate non-competes under the laws of the 46 states that (currently) permit them. While the current case status suggests DraftKings has the edge, any future bets remain risky given the unsettled nature of the house rules in these circumstances. We will keep you updated on the action as this case develops.

[1] Certainly, the nature of the trade secret misappropriation allegations against Hermalyn, many of which the district court found credible, combined with his representations in response, which the district court found lacking in “candor,” have done him little favors.

By Erin Hawthorne

Seyfarth Synopsis: Non-disclosure agreements (NDAs or confidentiality agreements) have come under fire in recent years due to concerns that they silence victims, conceal unlawful behaviour and prevent companies and regulators from understanding the full scope of systemic problems. These are all valid concerns. However, the part that often gets overlooked when discussing the use of NDAs is that there are good reasons why NDAs are commonly used. It is important to recognise this when we discuss how they should be used in the future.

What’s good about NDAs?

Let’s say workplace relationships have irretrievably broken down. There are allegations (and sometimes counter-allegations) of wrongdoing. NDAs can give people the choice to cease hostilities and walk away if they want to.

What does the alternative look like? If there was no way to guarantee confidentiality:

  • Alleged wrongdoers might feel they have no option but to strenuously defend allegations to protect their reputation and position – as opposed to openly reflecting on how their words or actions have been perceived and seeking to make amends and/or change.
  • Businesses might be forced to defend claims that they consider to have little or no merit – the view might be taken that if the business will be exposed to the reputational damage of the allegations being made public, then its best option is to have those allegations tested in a rigorous legal process.
  • Importantly, victims might be forced into formal and potentially adversarial complaint and/or legal processes – because those represent the only option for resolution for the reasons above.
  • Regardless of the outcome of any investigation, disciplinary and/or legal processes, simply participating in these processes can be traumatising to all the people involved. These kinds of processes often also take some time to conclude, meaning that those people may be stuck in a state of limbo for weeks, months or years.  

The Australian Human Rights Commission recognises this. Its Guidelines on the Use of Confidentiality Clauses in the Resolution of Workplace Sexual Harassment Complaints highlights that “confidentiality provisions can enhance victim-centricity of the response, for example by providing anonymity and privacy where that is the victim’s choice, as well as enabling greater flexibility for the parties to reach a resolution that is faster and less formal than litigation.”

Particularly if the evidence has never been tested in a formal investigation or legal process, there may also be a legitimate interest in parties ensuring that any settlement includes agreed limits on future comments about what can be highly sensitive (but unsubstantiated) allegations.

What kind of steps should businesses think about to ensure NDAs are appropriate?

Drawing on what we have seen overseas and the key themes of the Human Rights Commission’s research and guidance, consider questions such as the following when using NDAs:

  • How can the business ensure the NDA will not inadvertently ‘cover up’ a genuine issue of concern? Even if the allegation was never ‘proven’ or ‘disproven’, is there a process in place to ensure that the fact the allegation was made is accounted for as appropriate in internal data gathering, oversight and decision making?
  • Are there the critical, sensitive allegations or facts for which there is a legitimate reason to restrict disclosure? If yes, can the NDA scope be tailored to reflect that? If not, then check the thinking on why an NDA is necessary.
  • Does this information have an expiry date, after which time it could be partly or fully disclosed?
  • Can partial, deidentified or full disclosure of factual information be permitted in appropriate circumstances e.g., to a doctor or mental health professional when seeking medical treatment, or to a regulator/government agency in the course of an investigation or inquiry or participating in a legal process?
  • Is the business willing to offer free independent legal advice to an individual before the NDA is signed, to ensure they understand and genuinely agree to it? (If that’s not an option, the Commission suggests considering providing them with guidance material and information about freely available community legal services who may be able to help.)

In short, a lot can be done to ensure that NDAs appropriately empower genuine choice.

Any suggestion that NDAs (and by extension, that choice) should be outlawed or extensively restricted may end up harming those most directly concerned.

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About the Program: The first installment of this series will focus on key developments in labor management relations and address the following topics:

  • What unions are prioritizing at the bargaining table and how recent contract settlements impacted industry standards
  • 2023’s wave of high-profile strikes and what they signal for the industry in 2024 and beyond
  • The impact of the Cemex decision on union organizing in these industries, and the practical implications for your operations

If you have any questions, please contact Brooke Janeczek at bjaneczek@seyfarth.com and reference this event.

Cost – There is no cost to attend, but registration is required.

Join a cross-disciplinary group of Seyfarth attorneys for a series of micro-webinars focused on top-of-mind legal considerations for the transportation and logistics industries.

Part 1: Key Developments in Labor Management Relations 

Thursday, August 22, 2024
1:00 p.m. to 1:45 p.m. Eastern
12:00 p.m. to 12:45 p.m. Central
11:00 a.m. to 11:45 a.m. Mountain
10:00 a.m. to 10:45 a.m. Pacific

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By Joshua D. Seidman, Sara Eber Fowler, and Renate M. Walker

What You Need to Know:

  • On July 31, 2024, the Michigan Supreme Court issued its long-awaited decision in Mothering Justice et al. v. Attorney General et al., holding in a 4-3 ruling that Michigan’s current paid sick leave law, the Paid Medical Leave Act, is unconstitutional and reinstating the State’s Earned Sick Time Act of 2018. This resolved nearly six years of uncertainty as to the status of paid sick leave in Michigan.
  • Michigan’s Paid Medical Leave Act has been in effect since March 2019. However, the mandate’s longevity has been an open question because it was implemented through an “adopt-and-amend” procedure that replaced the Earned Sick Time Act (see further, below). The legality of that procedure was the subject of this decision.
  • This week’s Michigan Supreme Court decision also held that Michigan’s Amended Wage Act was similarly unconstitutional, which will result in an increase to Michigan’s minimum wage (likely by at least $2).
  • Accordingly, the Earned Sick Time Act will replace the Paid Medical Leave Act effective February 21, 2025. This same effective date applies to changes in Michigan minimum wage under the Wage Act.
  • Notably, the Earned Sick Time Act is a significantly more pro-employee mandate than the current standards under the Paid Medical Leave Act, and will provide more generous paid sick leave rights than many other states.
    • Nonexclusive highlights include: broader employee eligibility; broader employer coverage; a faster paid sick leave accrual rate; an increased annual usage cap; likely no annual accrual cap or year-end carry over cap; and broader reasons for use and covered family members.
  • Important for employers, the Michigan Supreme Court determined that employers cannot be held liable for their reasonable reliance on the State government’s assurances that the Paid Medical Leave Act and amended Wage Act were good law. Thus, employers that followed the amended laws will not be penalized.

Background:

Paid sick leave mandates have rapidly proliferated in states and municipalities around the country for more than a decade.[1] Each law brings a unique set of substantive requirements, as well as its own backstory on how and why the law was ultimately enacted. Michigan’s paid sick leave saga is especially distinct,[2] with the latest – and perhaps final – chapter being written earlier this week by the Michigan Supreme Court.

Michigan’s complicated paid sick leave history began nearly six years ago. In September 2018, the Michigan Legislature approved a ballot initiative, known as the Michigan Earned Sick Time Act (“ESTA”).  The initiative, which was scheduled to go into effect on April 1, 2019, required employers statewide to provide employees with paid sick leave for certain covered absences. Since ESTA was adopted by the Legislature, as opposed to public vote, the Michigan Legislature reserved the right to amend the law with a simple majority vote before its effective date.  

On December 5, 2018, the Michigan Legislature amended ESTA by adopting the Paid Medical Leave Act (“PMLA”) (i.e., the “adopt-and-amend” procedure mentioned above), which constituted a major overhaul of the ESTA standards (see comparisons below).  The PMLA, rather than ESTA, went into effect on March 29, 2019. Covered employers have had to comply with the PMLA ever since.

In May 2021, two Michigan employees, two Michigan nonprofit corporations, and the two organizations that circulated the statutory initiative petitions to provide earned paid sick leave to Michigan workers filed Mothering Justice and sought to (1) render the PMLA null and void on constitutional grounds because it amended the proposal that the Legislature had adopted during the same legislative session, and (2) reinstate the 2018 ESTA and original wage increases.  

On July 19, 2022, the Michigan Court of Claims held that the adopt-and-amend process that the Legislature used to enact the PMLA violated the Michigan Constitution and that the original September 2018 version of the sick leave law (ESTA) had to be reinstated. For several months, it appeared that the ESTA was going to begin in mid-February 2023. However, in late-January 2023, the Michigan Court of Appeals overturned the Michigan Court of Claims decision, which left the PMLA in effect indefinitely.

The Michigan Court of Appeals decision was appealed to the Michigan Supreme Court shortly thereafter. In July 2023, the Michigan Supreme Court agreed to hear the matter. On July 31, 2024, the Michigan Supreme Court issued its decision, which as noted above, resulted in the reinstatement of the ESTA, effective February 21, 2025.

Michigan ESTA vs. PMLA:

The ESTA and PMLA differ in a number of significant substantive ways. Here are some highlights:

  • Employee Eligibility:
    • PMLA (current): Specifies 12 exclusions from its definition of “eligible employee.” To be eligible under the PMLA, employees must have (a) worked an average of 25 or more hours per week in the immediately preceding calendar year, and (b) their primary work location be in Michigan. The PMLA’s protections also do not extend to a number of other individuals, including but not limited to, the following:
      • employees exempt from overtime under the FLSA;
      • private sector employees covered by a CBA;
      • certain temporary help service firm employees disqualified from receiving benefits under the Michigan Employment Security Act;
      • variable hour employees as defined by federal regulations governing the Affordable Care Act;
      • individuals employed by an employer for 25 weeks or fewer in a calendar year for a job scheduled for 25 weeks or fewer;
      • an employee as described in Section 201 of the Railway Labor Act; and
      • individuals employed by an air carrier as a flight deck or cabin crew member that is subject to Title II of the Railway Labor Act.
    • ESTA (begins 2/21/2025): ESTA contains a much broader definition of “employee” than does the PMLA. Specifically, “employee” means an individual engaged in service to an employer in the business of the employer, with the only carveout being an individual employed by the United States government.
    • Takeaway: Many Michigan employees who have not been eligible for paid sick leave under the PMLA will be entitled to paid sick leave under the ESTA when it goes into effect.[3] Employers should review their policies to ensure excluded employees are covered.
  • Employer Coverage:
    • PMLA (current): Only employers with 50 or more individuals are subject to paid sick leave obligations under the PMLA.
    • ESTA (begins 2/21/2025): ESTA contains a much broader scope of employer coverage than the PMLA. Specifically, “employer” means a person, firm, business, etc. that employs one or more individuals. While ESTA does allow for reduced paid sick leave obligations for “small businesses” (see below), the threshold to qualify is having fewer than 10 individuals work for compensation during a given week, and even then certain paid sick leave standards still apply.
    • Takeaway: Smaller Michigan employers who are not currently subject to paid sick leave obligations under the PMLA will be covered by the ESTA when it goes into effect. Such employers should begin preparing for ESTA compliance.
  • Accrual Rate:
    • PMLA (current): Employees accrue paid sick leave at the rate of one hour for every 35 hours worked.
    • ESTA (begins 2/21/2025): Employees accrue paid sick leave at the rate of one hour for every 30 hours worked.
    • Takeaway: Employees will accrue paid sick leave faster under the ESTA than they currently do under the PMLA.
  • Accrual Cap:
    • PMLA (current): Employers can cap employees’ paid sick leave accrual at a maximum of 40 hours per benefit year.
    • ESTA (begins 2/21/2025): No express cap on how much paid sick leave eligible employees can accrue in a benefit year.
    • Takeaway: Employees will likely accrue greater amounts of paid sick leave in a benefit year under the ESTA; absent further guidance from the State, employers should ensure that their processes do not halt accrual at 40 hours.
  • Annual Usage Cap:
    • PMLA (current): 40 hours per year.
    • ESTA (begins 2/21/2025): 72 hours per year. Reduced paid leave for “small businesses.”[4]
    • Takeaway: Employees will be able to use greater amounts of available paid sick leave in a benefit year under ESTA than they currently do under the PMLA. The 72-hour usage cap is among the higher usage caps nationally.
  • Year-End Carryover:
    • PMLA (current): Employers can set a 40-hour cap on the amount of earned, unused paid sick leave that employees can carry over at year-end.
    • ESTA (begins 2/21/2025): No express cap. Law states “earned sick time shall carry over from year to year.”
    • Takeaway: Employees likely will be able to carry over more earned, unused paid sick leave at year-end under ESTA than they currently can under the PMLA.
  • Frontloading:
    • PMLA (current): Employers that provide eligible employees with a frontloaded grant of at least 40 hours of paid sick leave at the start of a benefit year can avoid the law’s accrual and year-end carryover obligations.
    • ESTA (begins 2/21/2025): No express provision.
    • Takeaway: It is unclear at this time whether Michigan employers that frontload paid sick leave at the start of a benefit year will be able to avoid accrual and carryover obligations when the ESTA goes into effect.
  • Covered Reasons for Use:
    • Takeaway: While the ESTA and PMLA largely cover the same absences for purposes of proper use of paid sick leave – employee or covered family member illness, injury, health condition, or preventative care; certain absences where the employee or covered family member is a victim of domestic violence or sexual assault; absences due to certain public health emergencies – the ESTA also covers meetings at the employee’s child’s school or place of care related to the child’s health or disability, or the effects of domestic violence or sexual assault on the child.
  • Covered Family Members:
    • Takeaway: The ESTA and PMLA both consider “family member” to include an employee’s child, parent, spouse, grandparent, grandchild and sibling. However, the ESTA also covers “domestic partner” and “any other individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship” in its definition of “family member.”
  • Use of PTO (or Other Paid Time Off) for Compliance:
    • PMLA (current): The PMLA contains language establishing a rebuttable presumption of compliance for employers that provide employees with at least 40 hours of paid leave each benefit year. Under the PMLA, “paid leave” includes, but is not limited to, paid vacation days, paid personal days, and paid time off (i.e., PTO).
    • ESTA (begins 2/21/2025): Under the ESTA, in order to use a non-sick paid leave or paid time off policy for compliance, the employer must provide other paid leave in at least the same amounts, that may be used for the same purposes and under the same conditions as those called for under the ESTA, and that is accrued at a rate equal to or greater than the rate under the ESTA.
    • Takeaway: While employers can use non-sick paid time off policies (i.e., PTO, vacation, personal time, etc.) for paid sick leave compliance under the ESTA, more burdensome criteria must be met in order to do so.
  • Increments of Use:
    • PMLA (current): 1-hour increments.
    • ESTA (begins 2/21/2025): Paid sick leave may be used in the smaller of hourly increments or the smallest increment that the employer’s payroll system uses to account for absences or use of other time.
    • Takeaway: Depending on the employer’s payroll system setup for tracking absences or use of other time, the ESTA could require that employers allow employees to use available paid sick leave in smaller increments than is currently the case under the PMLA.
  • Documentation:
    • PMLA (current): The PMLA does not restrict employers’ ability to require reasonable documentation following a paid sick leave absence of less than three consecutive days. Instead, employees must comply with their employer’s usual and customary documentation requirements for requesting leave when using paid sick leave.
    • ESTA (begins 2/21/2025): An employer must wait for an employee to be absent for more than three consecutive days before it can require the employee to provide reasonable documentation justifying that paid sick leave was used for a proper reason.
    • Takeaway: The ESTA imposes greater burdens on employer paid sick leave documentation practices than is currently the case under the PMLA. However, this requirement is similar to many other national paid sick leave laws.
  • Unlawful Retaliation / Interference:
    • PMLA (current): No express provisions.
    • ESTA (begins 2/21/2025): Contains provisions prohibiting both unlawful retaliation and unlawful interference.
    • Takeaway: Employers face greater risk of being penalized for unlawful retaliation and unlawful interference based on their Michigan paid sick leave policy and practices under the ESTA than they currently do under the PMLA.
  • Enforcement and Statute of Limitations:
    • PMLA (current): The PMLA does not provide a private civil cause of action to aggrieved employees. Instead, the PMLA requires aggrieved employees to file a claim with the Michigan Department of Licensing and Regulatory Affairs (the “Department”) within six months after the alleged violation.
    • ESTA (begins 2/21/2025): An employee who believes an employer has violated the ESTA may file a civil action against the employer at any time within three years after the violation or the date when the employee knew of the violation. Filing a claim with the Department is neither a prerequisite nor a bar to bringing a civil action.
    • Takeaway: The risk of being penalized for paid sick leave law noncompliance is greater under the ESTA than it is under the PMLA.
  • Other Standards: In addition to the above, there are a number of other substantive topics worth assessing to determine whether and, if so how, they differ between the PMLA and the ESTA. Nonexclusive examples include employee notice to the company, recordkeeping, posting and notice, reinstatement of earned, unused time upon rehire, and rate of pay.

Employer Takeaways:

As noted above, given the ways the ESTA expands paid sick leave entitlements and conditions compared to the current standards under the PMLA, Michigan employers should prepare for an increase in job-protected paid sick leave absences when the ESTA begins. Employers should also consider taking the following steps to comply with the ESTA (and new minimum wage requirements) in advance of the February 21, 2025 effective date:

  • Review existing policies, practices, procedures, and systems to ensure compliance with the ESTA and the new minimum wage requirement. Specifically, employers should ensure all necessary employees receive paid sick leave under the ESTA.
  • Train supervisory and managerial employees, as well as HR, on the new requirements.
  • Monitor the Michigan Department of Labor and Economic Opportunity’s website for updates, including but not limited to, potential rulemaking, FAQs, and model notices.

We will continue to monitor and provide updates on Michigan paid sick leave developments as the ESTA’s new effective date approaches and on any subsequent changes.

With the paid leave landscape continuing to expand and grow in complexity, companies should reach out to their Seyfarth attorney for solutions and recommendations on addressing compliance with nationwide paid leave requirements. To stay up-to-date on paid leave developments in Michigan and beyond, click here to sign up for Seyfarth’s Paid Sick Leave mailing list. Companies interested in Seyfarth’s paid sick leave laws survey should reach out to paidleave@seyfarth.com. 

[1] Today, the states that have enacted a statewide general non-COVID-19 paid sick leave or paid time off mandate include: (1) Arizona; (2) California; (3) Colorado; (4) Connecticut; (5) Illinois (PTO law) (effective 1/1/2024); (6) Maine (PTO law); (7) Maryland; (8) Massachusetts; (9) Michigan; (10) Minnesota (effective 1/1/2024); (11) Nevada (PTO law); (12) New Jersey; (13) New Mexico; (14) New York; (15) Oregon; (16) Rhode Island; (17) Vermont; and (18) Washington. In addition, (19) Virginia has a statewide paid sick leave law that applies only to certain home health workers. There also is a non-COVID-19 paid sick leave mandate in (20) Washington, D.C.. Further there are more than two dozen municipalities with non-COVID-19 paid sick leave or paid time off mandates in the United States.

[2] Seyfarth has been tracking the evolution of Michigan paid sick leave for the last six years as part of our “If Pain, Yes Gain” dedicated paid sick leave and paid time off law article series. Our prior Legal Updates on Michigan are available: here, here, here, here, here, and here.

[3] With respect to employees covered by a CBA, the ESTA states that if such a CBA is in effect on the effective date of the ESTA, the law will apply beginning on the stated expiration date in the CBA, notwithstanding any statement in the CBA that it continues in force until a future date or event or the execution of a new CBA.

[4] For “small businesses,” ESTA sets a 40 hour annual usage cap for paid sick leave. However, if an employee of a small business accrues more than 40 hours of sick leave in a year, the employee is entitled to use an additional 32 hours of unpaid sick leave in that year.