“…the court ultimately sided with the MCLA and others who support the order.”
AIM Inc., a.k.a. Automated Industrial Machinery, Inc., manufactures two-dimensional and three-dimensional computer-controlled metal bending machinery. Founded in 1992 by Constantine Grapsas, the company is an active machinery exporter via its two manufacturing facilities in North America and Europe. The governor of Illinois awarded AIM the Governor’s Export Awards for outstanding accomplishments in the export of goods and services around the globe.
Unfortunately, Illinois courts have failed to support the growth and well-being of such manufacturers through their astonishingly out-of-step interpretation of non-compete agreements.
After 13 years with the company, AIM’s VP of engineering, a company board member, officer and shareholder, quit and began directly competing with AIM, although there was a non-compete agreement in place. AIM filed suit. An Illinois lower court found the non-compete agreement unenforceable due to a lack of adequate consideration since the employee had signed it less than two years before leaving. AIM was also ordered to pay the defendant’s legal fees, and, because he was a shareholder, AIM had to provide yearly financial reports to the former-employee-turned competitor!
Thus, the Illinois courts have put its manufacturers in the position of potentially training their future competitors, with no way to legally protect themselves until after two years of employment. This does not make manufacturing in the United States more competitive, and the National Association of Manufacturers (NAM) and other organizations are working to help right this wrong.
AIM appealed the lower court’s ruling, and the NAM filed an amicus brief in the Illinois Appellate Court case, Automated Industrial Machinery, Inc. v. Christofilis, in support of AIM. Illinois is the only state that imposes a bright-line two-year rule for a restrictive covenant, which makes Illinois more expensive, and less attractive, for manufacturers to do business. In each of the states surrounding Illinois, an employer can hire an employee and expose that employee to proprietary trade secrets immediately, confident that the restrictive covenant securing its trade secrets will be enforced.
In an unpublished non-precedential opinion heard without oral argument, the Illinois Appellate Court affirmed the circuit court’s judgment. The Appellate Court acknowledged that there is a possibility that the Illinois Supreme Court would reject a two-year rule in favor of a more fact-specific approach.
As a last resort, AIM will now be appealing to the Illinois Supreme Court, but the court can choose which cases it accepts for review. It is hoped the Supreme Court will review this important case and employ a fact-specific, totality of the circumstances test when examining a post-employment restrictive covenant.
The 2nd Circuit Court of Appeals has interpreted securities laws as requiring disclosure of information about uncertain future conditions, which potentially subjects many public companies, particularly manufacturers, to increasing and unwarranted civil suits. Because of these concerns, the National Association of Manufacturers (NAM) filed an amicus brief in November 2016, asking the U.S. Supreme Court to review the 2nd Circuit’s decision in Leidos, Inc. v. Indiana Public Retirement System. After the Supreme Court agreed to hear this case, the NAM filed another amicus brief addressing the merits of the case on June 28.
This case concerns liability for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 based on a failure to disclose adverse “trends” and “uncertainties,” which requires management to use its judgment in describing known trends and uncertainties that are “reasonably likely” to occur. This is part of necessary disclosures of many reports required of publicly traded manufacturing companies under federal securities laws, including quarterly and annual reports. The 2nd Circuit’s decision calls for far more disclosure than a pure materiality standard, and it calls for disclosure of purely “soft” information, all of which makes it easily susceptible to hindsight pleading.
The Supreme Court needs to resolve this issue because there is an express circuit split between the 9th and 3rd Circuits, on the one hand and the 2nd Circuit on the other. The 9th and 3rd Circuits hold that not disclosing a “trend” or “uncertainty” does not give rise to 10(b) liability, while the 2nd Circuit has held that it does. The 2nd Circuit’s holding will open up a significant new category of securities fraud claims, and, contrary to earlier Supreme Court decisions, it subjects companies to securities fraud liability for omitting disclosures, even when the “omitted” information is not necessary to make any affirmative statement not misleading. This represents a dangerous precedent and exposes issuers to ever-increasing litigation, and the hindsight problem is exacerbated by the fact that it concerns disclosures of “soft information” that are often subjective.
If the 2nd Circuit’s ruling is allowed to stand, plaintiffs might start pleading everything as a “trend” or “uncertainty” that should have been disclosed. Public companies could be exposed to “fraud-by-hindsight” litigation if shrewd plaintiffs allege that an event was known to management as being reasonably likely to occur, including knowledge of “soft information.” This issue is a slippery slope where manufacturers may be subject to private suits for securities fraud for failing to disclose information that may not be material.
Because the 2nd Circuit’s ruling introduces more uncertainty into an area that demands certainty and predictability, the logical outcome for companies is to over-disclose potential “trends and uncertainties” so that they might mitigate the increased likelihood of being sued for securities fraud. As the Supreme Court first anticipated more than 40 years ago, such a rule of law will “lead management simply to bury the shareholders in an avalanche of trivial information—a result that is hardly conducive to informed decision-making.” A win in this case would significantly limit public company exposure to liability for securities fraud as well as provide clarity regarding disclosure obligations.
The Environmental Protection Agency’s (EPA) new Risk Management Program (RMP) rule, published on January 13, 2017, revised an existing rule designed to reduce chemical hazards and related accidental releases. The rule imposes various recordkeeping, auditing, disclosure and mitigation mandates under the Clean Air Act on companies that handle various chemicals, which include many manufacturing companies. The new requirements were not adequately evaluated or justified by the Obama administration, and we have been working with the EPA under the Trump administration to improve some of these problems.
For example, the rule raises significant security concerns from required disclosures of hazardous material information and compliance issues that will cause irreparable harm to manufacturers by requiring them to make available sensitive information that could expose plant vulnerabilities. The rule also imposes costly audit requirements for “each covered process” without justification, and the agency failed to conduct an adequate assessment of the costs and benefits.
On February 28, the NAM and other industry associations submitted to the EPA a petition for reconsideration of the RMP, and the agency agreed to meet with us the following week to listen to our concerns.
The NAM and industry groups also filed a lawsuit on March 13 in the U.S. Circuit Court of Appeals for the District of Columbia, asking the court to review the validity of the Obama administration’s action implementing changes to the RMP rule under the Clean Air Act. Later that same day, EPA Administrator Scott Pruitt issued a 90-day delay of the effective date of the RMP rule. This will give the agency time to review our concerns and will temporarily suspend the compliance burden.
We are pleased that the EPA listened to manufacturers’ issues with the new rule and that it agreed to delay the effective date. This delay gives the EPA time to reconsider and review the rule’s requirements, without imposing unnecessary confusion and compliance costs on manufacturers.
The Manufacturers’ Center for Legal Action will continue to monitor developments affecting manufacturers and provide regular updates. Please do not hesitate to contact NAM Associate General Counsel Leland Frost at firstname.lastname@example.org with any questions.
On November 23, the European Court of Justice (ECJ) released its decision in European Commission v. Stichting Greenpeace, setting aside a lower court judgment requiring disclosure of confidential business information (CBI). While the ECJ’s decision is certainly good news for manufacturers, it is not yet a clear victory.
The plaintiffs requested the public disclosure of a massive amount of CBI relating to certain pesticides used both in the United States and Europe, including how products were manufactured and their final composition in order to assess potential environmental emissions. The lower court broadly interpreted EU emissions disclosure rules in favor of the plaintiffs, which left two options for companies selling goods in the European Union. Either they accept that their trade secrets will be made public, meaning that their data can be used and abused anywhere in the world by competitors, or they decide not to market their products in the European Union altogether, with obvious adverse consequences for the companies and the European Union as a whole.
In 2015, the ECJ granted the National Association of Manufacturers (NAM) intervener status, and in so doing, the court recognized the interest of the U.S. industry in this case. The NAM argued that the lower court’s interpretation was excessively broad and that the lack of adequate protection for the confidentiality of proprietary data in the European Union would be a significant barrier to market access for U.S. manufacturers of many products. The NAM is a strong supporter of global trade and investment rules that promote trade on a level playing field and provide a system in which all countries abide by core principles, including the protection of intellectual property. Governmental protection of CBI is needed to justify the considerable time, cost and effort involved in developing and marketing new technology as well as updating and improving older technologies.
The ECJ agreed with the NAM that the lower court erred by broadly interpreting EU disclosure for the emissions rule. The ECJ set aside the judgment and provided a more limited interpretation of EU disclosure rules. However, the ECJ did not assess whether the CBI in this case falls under that limited interpretation, and it sent the case back to the lower court to decide. Once the lower court decides whether the CBI at issue must be still disclosed under the limited interpretation, this case will potentially be appealed again. In the meantime unfortunately, the exact scope of the rule remains unclear. We prevailed on the larger attack against disclosing the CBI, but the fight will continue on this issue and in future cases concerning whether specific fact patterns fall within the emissions rule.
On May 2, 2016, the National Association of Manufacturers joined with the American Foundry Society to challenge the Occupational Safety and Health Administration’s (OSHA) new crystalline silica rule, which cuts the current permissible exposure limit in half and requires employers to implement costly engineering controls. The rule attempts to limit exposure to silica-containing materials, such as concrete and stone, in industries like brick manufacturing, foundries and hydraulic fracturing. We are fighting this rule on all fronts by both petitioning for review of the final rule and intervening to address the union filings directly. Last week, on November 11, we filed our joint industry opening brief to oppose this rule, which will severely stunt the economy and burden manufacturers. Read More
Yesterday, Judge Marcia A. Crone of the Eastern District of Texas granted a nationwide injunction for the majority of the Fair Pay and Safe Workplaces regulation, otherwise known as “blacklisting.” The order states that business groups “properly demonstrated immediate and ongoing injury to their members if the rule is allowed to take effect,” adding that based on the National Association of Manufacturers’ conflict minerals disclosure lawsuit against the Securities and Exchange Commission, the Blacklisting Order was also likely a “compelled public reporting requirement violating the First Amendment.”
The regulation, finalized in August, places extensive and burdensome new reporting requirements on federal contractors in an attempt to achieve broad and sweeping labor law reforms, and it would have gone into effect today if the judge had not ruled. The only area where the preliminary injunction was not granted is the January 1, 2017, Paycheck Transparency provision, which, upon implementation, would require contractors and subcontractors to provide employees with documentation of regular and overtime hours worked, pay and additions to or deductions from pay that are not currently included in employee paychecks. The decision strongly affirms the arguments related to the First Amendment, due process, constitutional, arbitrary and capricious concerns and others raised in the complaint.
This regulation arises out of the executive branch’s attempt to parlay the federal government’s limited proprietary authority over the procurement of government contracts into a regulatory tool designed to achieve broad and sweeping labor-law reforms. Implementation for prime contractors was set to begin on October 25, 2016, for contracts of $50 million or more and requires reporting of one prior year of labor law violations. The threshold for contract size drops to $500,000 on April 25, 2017. The reporting period extends to the three prior years of labor law violations starting on October 25, 2018. Covered disclosures of labor law violations include civil judgments, administrative merits determinations and arbitral awards, including those that are not final or still subject to court review. The number and severity of the alleged and proven violations will be a factor in the awarding of contracts, affecting thousands of manufacturers.
The judge ruled that the First Amendment claim will likely be successful on the merits based on the court’s logic in NAM v. SEC (D.C. Cir. 2014). Specifically, the court stated, “The Executive Order, FAR Rule and DOL Guidance share the same constitutional defect as the conflict minerals rule in NAM, only more so. The Order, Rule and Guidance compel government contractors to ‘publicly condemn’ themselves by stating that they have violated one or more labor or employment laws. The reports must be filed with regard to merely alleged violations, which the contractor may be vigorously contesting or has instead chosen to settle without an admission of guilt, and, therefore, without a hearing or final adjudication.” The appeals court in NAM “further took issue with the government’s attempt to force companies to ‘stigmatize’ themselves by filing the required reports, stating, ‘Requiring a company to publicly condemn itself is undoubtedly a more ‘effective’ way for the government to stigmatize and shape behavior than for the government to have to convey its views itself, but that makes the requirement more constitutionally offensive, not less so.’”
Manufacturers are pleased that Judge Crone enjoined the implementation of this regulation that would have far-reaching negative impacts on companies with federal contracts. The NAM will continue fighting for manufacturers in the courts to turn back the growing wave of federal regulations that hamper growth.
The Manufacturers’ Center for Legal Action filed a complaint with a coalition of other associations on September 20 to challenge the Department of Labor’s (DOL) new overtime rule, asserting the new rule exceeds the authority of the DOL under the Fair Labor Standards Act (FLSA). Unless a court stops it, this unprecedented rule will impair employers’ ability to classify as exempt from overtime executive, administrative, professional and computer employees. The new rule will go into effect on December 1, 2016, causing economic harm to both employers and the employees who will be subject to the new overtime requirements.
The new overtime rule drastically alters the DOL’s minimum salary requirements—increasing the minimum by 100 percent, from $23,660 to $47,476 annually—so as to impose new overtime payment requirements on businesses of all sizes. This directly effects those individuals who have historically been considered exempt from overtime pay. Due to the drastic rise in the salary threshold, employees will have to be reclassified and will inevitably lose many of the benefits and flexibilities that go along with being an exempt employee, such as flexible work schedules that permit employees to sometimes work outside of the normal business hours due to personal obligations.
In addition, the DOL’s new rule permits employers for the first time to count nondiscretionary bonuses, incentives and commissions toward up to 10 percent of the minimum salary level for exemption; however, this provision is so restricted by the DOL as to be meaningless. It also establishes an unprecedented automatic “escalator” provision that will dramatically increase the minimum salary every three years without a rulemaking. Congress has provided for automatic increases in other areas, such as the cost of living for Social Security benefits, but Congress has never provided for automatic increases of the minimum wage. The escalator provision exacerbates the detrimental impact on businesses, both large and small, by automatically updating the minimum salary requirements to even higher levels every three years.
The DOL has failed to recognize the infeasibility, costs and real-world impacts of the new overtime rule. As noted in our press release, manufacturers of all sizes will bear the burden of this costly regulation that will force many employers to cut critical programming, staffing and services to the public. Many of these employers will lose the ability to effectively manage their workforces and provide flexibility to valued employees on the pathway to the middle class. This new rule will injure employers and employees across many industries, job categories and geographic areas by denying them opportunities for advancement and hindering performance of their jobs. We are hopeful that the court will understand the importance of this issue and overturn the DOL’s new overtime rule.