the ruby files: the case of the disappearing secrets and an independent contractor

The Ruby Files: The Case of the Disappearing Secrets and an

Independent Contractor

Eric E. Packel, Stephen E. Fox, Jeffrey S. Bell, Judy Yi, Matt Todd

Background Facts

Outside Tech, Inc.: large technology service company who contracts with companies to develop or service software and information technology systems.

Outside Tech employs some I.T. technicians, but also contracts with some as independent contractors.

Ruby applies at Outside Tech

Outside Tech enters into Independent Contractor Agreement with Ruby

Independent Contractor Relationship – Misclassification Implications

U.S. DOL / IRS audit (monetary penalties)

o DOL Press Releases of its activities: https://www.dol.gov/whd/workers/misclassification/pressrelease.htm

Class action lawsuits

o Uber Technologies Lawsuit (2016): Uber Technologies agreed to pay up to $100 million to settle class-action lawsuits in California and Massachusetts in which drivers sought to be reclassified as employees instead of independent contractors. Uber drivers claimed they were entitled to be reimbursed for their expenses that Uber should have to pay (e.g., gas and vehicle maintenance), and challenged Uber’s practice of telling passengers that the gratuity is included and not to tip the drivers, even though the drivers were not receiving a tip

o FedEx Ground Package System Inc. (2016): FedEx has agreed to pay drivers in 20 states $240 million to settle lawsuits claiming the company misclassified them as independent contractors

National Labor Relations Board rulings

o IC Diagnostics. Fiddlehead Theatre Company, Inc., No. 01-RC-179597 (NLRB, July 26, 2016): The NLRB ruled that musicians who played in performances for a Massachusetts production company, Fiddlehead Theatre Company, Inc., are employees and not independent contractors and that a union election should proceed

o XPO Cartage, Inc., No.21-CA-150873 (July 14, 2016); Laca Express, Inc., NLRB Region 21, No.21-CA-150928 (June 28, 2016): The NLRB Regional Office in Los Angeles issued unfair labor practice complaints against XPO Cartage and Laca Express, based on charges filed by the International Brotherhood of Teamsters: that drivers have been misclassified as independent contractors and inhibiting them from engaging in Section 7 activity

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https://www.dol.gov/whd/workers/misclassification/pressrelease.htm

Independent Contractor Relationship – Best Practices

Have a written independent contractor agreement

Maintain consistent separation of documents, forms, terminology for employees and independent contractors

Do not have employees and independent contractors perform the same or similar work

Do not provide tool, supplies, insurance and other benefits offered to employees

Do not reimburse expenses

Do no supervise day-to-day work in the manner and schedule for the work to be completed (can demand certain product or result, but not how it is done)

Ensure you have trade secret and confidential information protections (e.g., Defend Trade Secrets Act)

Be careful with prohibiting competition

Be careful with indefinite independent contractor engagements

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Outside Tech, Inc.

Marine Sky

Company B

Independent Contractor

Technicians; Ruby

Employee Technicians

Company A

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Conversation

Rachel: Hey Ruby. When are we getting lunch?

Ruby: I don’t know. I started a new job.

Rachel: Ruby. Another job? How many jobs have you had this year??

Ruby: It’s not my fault I was sexually harassed and had to find a new job. Can you blame me??

Rachel: Ruby lighten up. You just don’t seem like yourself. So what is the new job?

Ruby: It’s an I.T. job. I was hired to go out to other companies and help with their computer systems.

Rachel: What company?

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Conversation

Ruby: It’s called Outside Tech. Lots of employees. Very professional, which I like.

Rachel: Professional how?

Ruby: Oh you know. I had to fill out a bunch of fancy forms, top secret stuff.

Rachel: Like what?

Ruby: I’m not sure, just top secret. They are giving me access to top secret information. I’m like a spy I guess. Well, not a spy, but I get to learn all sorts of cool stuff. I didn’t really read what I signed.

Rachel: Hmmm.

Ruby: Yeah, and if things don’t work out, then I’ll know some pretty cool stuff. Maybe a future here.

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DOL Conversation

Investigator: DOL, Special Investigator Robbins speaking.

Ruby: Oh hi Special Investigator. This is Ruby Breaker. I have a concern with my new employer.

Investigator: Did you say Ruby Breaker? From before?

Ruby: Yes! How have you been?

Investigator: What’s your concern? I’m on my lunch break. Trying to eat a cheese sandwich here.

Ruby: Oh well, my employer has some employees I think may not legally be employed. And with all this talk about immigration, I got concerned. Plus, I heard they aren’t getting paid the same as me.

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DOL Conversation

Investigator: Why don’t you come down again?

Ruby: Oh yay! It will be great to catch up with you, see how you’ve been. I will say, I have gotten some great information on how to service companies. I’ve also learned a lot about the marine business. Technical stuff but kind of fun.

Investigator: I really need to finish this cheese sandwich. It’s getting soggy.

Ruby: I hate when they get soggy and flimsy…

Investigator: Ms. Beaker, come down if you want.

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Immigration Issues

Did Outside Tech need to complete an I-9 Form for Ruby?

What about other independent contractors?

What are Marine Sky’s obligations?

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Outside Tech is required to complete I-9 forms newly hired employees.

The I-9 requirement does not apply to independent contractors.

Outside Tech can’t engage independent contractors if it knows the contractors are not authorized to work in the US.

– Actual knowledge

– Reasonable person standards

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Immigration Verification

Contractor Immigration Liability

Companies can minimize exposure through independent contractor immigration compliance certifications.

Outside Tech’s options with its own independent contractors – Contractor certifies to Outside Tech that he or she is legally authorized

to work in the United States

Outside Tech’s agreements with end users such as Marine Sky – Marine Sky may demand Outside Tech certify compliance with

immigration laws

– Agreements apply to both employees and contractors

– May require Outside Tech to perform I-9 audit

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Is Ruby an Independent Contractor or an Employee?

IRS 20-Factor Test / “Right to Control” Test: Behavioral Control, Financial Control, Type of Relationship

1. Level of Instruction. If the company directs when, where, and how work is done, this control indicates a possible employment relationship.

2. Amount of Training. Training workers suggests an employment relationship since the company is directing the methods by which work is accomplished.

3. Degree of Business Integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.

4. Extent of Personal Services. Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors are free to assign work to anyone.

5. Control of assistants. If a company hires, supervises and pays a worker’s assistants, this control suggests a possible employment relationship.

6. Continuing relationships. A continuous relationship between workers and companies indicate that employer-employee relationships exist. However, a contractor arrangement can involve an ongoing relationship for multiple, sequential projects.

7. Set hours of work. The establishment of set hours of work by a company indicates control typical for employees.

8. Full-time required. If workers must devote full time to company’s’ business, the company has control over the worker’s time. Independent contractors are free to work when and for whom they choose.

9. Need for On-Site Services. Control is indicated if the work is required to be performed on the company’s premises, especially when it can be performed elsewhere.

10. Order or sequences set. Control is indicated if workers are not free to choose their own patterns of work but must perform services in the sequences set by the company.

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IRS 20-Factor Test / “Right to Control” Test:

11. Requirements of reports. Control is suggested if workers must submit regular oral or written reports to company.

12. Method of payment. Hourly, weekly or monthly pay schedules points to an employer-employee relationship,

provided that this method of payment is not just a convenient way of paying a lump sum agreed on as the cost of a

job. Independent contractors are usually paid by the job or on straight commission.

13. Payment of business and/or traveling expense. Companies paying workers’ expenses of this nature suggests

an employer-employee relationship.

14. Providing tools and materials. If a company furnishes significant tools, materials, and other equipment, it

suggests an employer-employee relationship.

15. Significant investments. Contractors typically invest in and maintain their own work facilities. In contrast, most

employees rely on their employer to provide work facilities.

16. Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize

significant profit or loss through their work generally are employees.

17. Working for multiple companies. If workers perform services for a number of unrelated persons at the same

time, they are usually independent contractors.

18. Availability to public. Workers are usually independent contractors if they make their services available to the

general public on a regular and consistent basis.

19. Control over discharge. A company’s unilateral right to discharge workers indicates that the workers are

employees. In contrast, a company’s ability to terminate a worker generally depends on contract terms.

20. Right to terminate. Workers are employees if they have the right to end their relationships with a company at any

time without incurring liability. Contractors cannot terminate services without liability, except as provided in their

contract.

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U.S. Department of Labor: “Economic Realities” Test:

A multi-factored “economic realities” test is commonly applied to determine whether an employer “suffers or permits” work creating an employment relationship triggering the FLSA. The July 15, 2015 Administrator’s Interpretation discusses six factors:

1. Is the work an integral part of the employer’s business?

2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?

3. How does the worker’s relative investment compare to the employer’s investment?

4. Does the work performed require special skill and initiative?

5. Is the relationship between the worker permanent or indefinite?

6. What is the nature and degree of an employer’s control?

Many state laws, such as state overtime laws, unemployment insurance, worker’s compensation, implicate different tests for classifying independent contractors and employees. Thus, an independent contractor relationship should be assessed on a state-by-state and law-by-law and basis.

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Resignation Conversation

Ruby: Hey Mr. Smith. I wanted to tell you I am leaving Outside Tech. Mr. Smith: Oh I’m real sorry to hear that. Can you tell me why? Ruby: Well I don’t like the way they are paying and treating their employees. Mr. Smith: Employees? I thought you were an independent contractor. Ruby: Whatever. Same difference. Anyway, I am so glad I had this opportunity to learn some really neat stuff here at Marine. I never knew how a lot of this worked, and now that I do, I am really glad. Mr. Smith: Well let’s not get ahead of ourselves. Let me remind you that you signed an agreement and you can’t disclose any of the information that you learned here. Ruby: Excuse me? Are you threatening me? Mr. Smith: I’m not threatening you. I am advising you. Ruby: Well that’s *******! I don’t work for you. I’ll show you! You ****! Mr. Smith: Why don’t you just get out of here Ms. Breaker. Ruby: Gladly!

What Is a Trade Secret?

“Trade Secret”

Form of intellectual property (different from patents, copyright and trademarks)

Focus is on proprietary, commercially valuable, information

Examples:

– Confidential manufacturing processes

– Formulae

– Customer lists

– Business plans/strategies

– Technologies not protectable by patent

– Employee records

• M.C. Dean v. City of Miami Beach, (SDFL) (5/16/15)

© Polsinelli 2016 25

Uniform Trade Secrets Act

Traditionally, trade secrets were a matter for state law before Uniform Law Commission published UTSA in 1979

– 47 states and 3 others (DC, PR, VI) have adopted

• Not NY, MA (pending), NC (but very similar)

– Variation from state to state

• Modest, but sometimes case dispositive: burden of proof; innocent acquisition; scope of information protectable; “reasonable” measures to protect, etc.


UTSA General Provisions

Provides definitions of “trade secret,” “misappropriation,” and “improper means”

Statute of limitations is 3 years

Authorizes preservation of secrecy during legal action (i.e., gag and protective orders)

Provides remedies of injunction, damages and attorneys’ fees

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Defend Trade Secrets Act of 2016

Rationale

Belief that US needed to federalize trade secret law

Trade secrets becoming more economically important

– Over $3 billion (same as all exports to Asia)

– 2.1 million U.S. jobs

Patent protection coming under fire

State-by-state variations increasing, making uniform protection more difficult


DTSA: Outline of Provisions

Forbes: “The New DTSA is the Biggest IP Development in Years”

Federal jurisdiction of theft of trade secrets in interstate or international commerce

Civil remedies for trade secret misappropriation

– Injunction

– Reasonable royalties

– Damages

New remedy—civil seizure


DTSA: Outline of Provisions

Employment Law issues:

No injunction to prevent new employment

Injunction aimed at new employment must be based on evidence of threatened misappropriation, and not “merely information the person knows”

Safe harbor for “whistleblowers” and “anti-retaliation” disclosure of trade secrets

Whistleblower and retaliation protection must be referenced in employment agreements and NDA’s


UTSA-DTSA Similarities

DTSA definition of “trade secret” is

substantially similar to UTSA

DTSA definition of “misappropriation” is


DTSA definition of “improper means” is




Remedies:

Injunction – UTSA § 2(a)/ DTSA §2(a)(3)(A)

– Actual/threatened misappropriation may be enjoined

• For length of time the trade secret exists

• Sufficient time to eliminate any competitive advantage due to misappropriation

Reasonable Royalties – UTSA § 2(b)/DTSA §2(a)(3)(A)(iii)

– “Exceptional circumstances”



Remedies:

Damages – UTSA § 3/DTSA §2(a)(3)(B)

– In addition to injunctive relief, may receive damages

• Includes the actual loss AND the unjust enrichment caused by misappropriation

– “Willful and malicious” behavior results in up to 2 times regular damages §2(a)(3)(c)

Attorney’s Fees – UTSA § 2 (b)/DTSA §2(a)(30(D)

– Court may award attorney’s fees to the prevailing party for willful and malicious misappropriation or actions made in bad faith


Remedies - Damages

Damages

– “Actual loss” caused by the misappropriation

– “Unjust enrichment” not addressed in actual loss computation

– Reasonable royalty as damages calculation method (“in lieu of other methods”)

Enhancement

– “Willfully and maliciously” misappropriated

– Not more than 2 times regular damages awarded


Remedies – Attorney’s Fees

Attorney’s fees may be awarded if

– Misappropriation claim was made “in bad faith”

• “May be established by circumstantial evidence”

– Motion to terminate injunction is made or opposed “in bad faith”

– Trade secret is “willfully and maliciously misappropriated”

– “Reasonable” attorney’s fees may be awarded

• Octane Fitness standard?

• Costs?



Other Provisions:

Preservation of Secrecy—permits sealing and “gag orders” during any legal action concerning the trade secrets

Statute of Limitations—claims may be brought 3 years after the misappropriation is discovered or should have been discovered by the exercise of “reasonable diligence” (UTSA § 6/DTSA §2(a)(d)


Remedies – Ex Parte Civil Seizure

Civil Seizure

New remedy—potentially very powerful

Order may issue “only in extraordinary circumstances”

Limitations

– Stringent requirements for issuing

– Stringent requirements for elements of order itself


Ex Parte Seizure Order

Requirements for issuing order: DTSA §2(b)(2)(A)(ii)

– Appropriate when ordinary injunction “would be inadequate” because party would “evade, avoid or otherwise not comply”

• Legislative history examples:

– Fleeing the country

– Planning to disclosure immediately

– “Otherwise not amenable” to enforcement

– Immediate and irreparable injury

– Harm to applicant of denying order …

(1) Outweighs harm to “legitimate interests” of ‘Seizee’

(2) Substantially outweighs harm to third parties


Ex Parte Civil Seizure

Applicant must show “likelihood of success” that:

– Information is a trade secret

– 'Seizee' misappropriated by “improper means”

– ‘Seizee’ has “actual possession” of property to be seized

– Application describes matter to be seized “with reasonable particularity” and identifies its location

– 'Seizee' would otherwise “destroy, move, hide or otherwise make inaccessible to the court” if applicant put ‘Seizee' on notice

– Applicant “has not publicized” the requested seizure

• “Don’t want to make news” – Leg history

• Query—only an “applicant” … what happens if media monitoring court dockets publicizes application?


Whistleblower Protections

DTSA provides safe harbor to whistleblowers who provide trade secrets to government

Whistleblower entitled to civil/criminal immunity for disclosing trade secret so long as purpose of disclosure is to report or investigate a suspected violation of law and is made:

– To the whistleblower's attorney

– To a government official

– In a court filing under seal

If whistleblower files lawsuit for retaliation against employer based on reporting of a suspected violation of law, whistleblower may also use the trade secret in that anti-retaliation lawsuit

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Whistleblower Protections

Employer must provide notice of immunity in any employment contract that governs the use of trade secret or confidential information

Notice of immunity must be provided in the contract itself or the contract must cross reference to a company policy document that discusses the employer’s reporting policy for suspected violations of the law

If employer fails to include notice in contract, it is prohibited from being awarded exemplary damages or attorneys' fees in suit under DTSA

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Advantages of DTSA

Principal advantage—nationally consistent substantive and procedural law – With USTA state-to-state differences, while minor, can be case-

dispositive (e.g., burden of proof; threatened misappropriation, innocent acquisition; scope of information protectable; “reasonable” measures to protect)

Other advantages – Private party civil access to federal courts

– More sophisticated judiciary

– Remedies enforceable nationwide; nationwide subpoena power

– Simpler trans-state procedural issues (e.g., discovery management)

– Significant new remedy—civil seizure


Next Time

“Transition and the fight for bathroom equality.”

Save the date: October 12, 2016

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Contact Information

Eric E. Packel

Shareholder | Polsinelli

Kansas City, MO 816.360.4249 [email protected]


mailto:[email protected]

Contact Information

Jeffrey S. Bell





Contact Information

Stephen E. Fox, Esq.


Dallas, TX 214.661.5582 [email protected]

@StephenEFox

https://www.linkedin.com/in/stephenefox



Contact Information

Matt Todd


Houston, TX 713.374.1650 [email protected]


Contact Information

Judy Yi




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