Contract analysis

I. EXECUTIVE SUMMARY Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") was retained by Lumos Analytics Inc. ("Lumos" or the "Company") to conduct a comprehensive California-specific review and enforceability analysis of the confidentiality, invention-assignment, and restrictive covenant provisions contained in Lumos's existing employment-related agreements for its one hundred forty-two (142) Californi

II. BACKGROUND AND ENGAGEMENT CONTEXT A. Company Overview Lumos Analytics Inc. is a Delaware-incorporated, California-headquartered software-as-a-service ("SaaS") and financial technology ("fintech") company that delivers artificial intelligence and machine learning ("AI/ML") based predictive analytics and fraud-detection solutions to mid-market financial institutions, including community banks, credit unions, and re

III. APPLICABLE LEGAL FRAMEWORK This section sets forth the principal legal authorities that govern the enforceability of the provisions at issue. Understanding this framework is essential to the provision-by-provision analysis that follows in Section IV. A. California Business & Professions Code § 16600 — Non-Compete Prohibition California Business and Professions Code Section 16600 provides, in pertinent part: "Exc

Section 16600 reflects California's strong and long-standing public policy in favor of open competition and employee mobility. California's approach is among the broadest non-compete prohibitions in the United States, standing in marked contrast to the majority of states, which permit non-compete agreements subject to a "reasonableness" analysis that considers factors such as the duration, geographic scope, and bread

Section 432.5 prohibits an employer from including a noncompete clause in an employment contract or requiring an employee to enter into a noncompete agreement where the clause or agreement does not satisfy an exception under Business and Professions Code Sections 16600 through 16602.5. This prohibition is substantively overlapping with Section 16600.5 but is codified in the Labor Code, thereby subjecting violations t

Section 2870 provides that any provision in an employment agreement that requires an employee to assign rights to an invention is unenforceable to the extent it applies to an invention that the employee developed entirely on the employee's own time without using the employer's equipment, supplies, facilities, or trade secret information, unless the invention relates at the time of conception or reduction to practice

Section 2871 provides that no employer shall require a provision made void and unenforceable by Section 2870 as a condition of employment or continued employment. Any such provision is to that extent against the public policy of California and is unenforceable.

Section 2872 establishes the mandatory notice requirement that is central to one of our critical findings in this memorandum. Section 2872 provides that, if an employment agreement contains a provision requiring the employee to assign or offer to assign any rights in any invention to the employer, the employer must, at the time the agreement is made, provide a written notification to the employee setting forth the pr

Section 1833(b) of the DTSA establishes an immunity provision for whistleblowers. Specifically, 18 U.S.C. § 1833(b)(1) provides that an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made (A) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, solely for th

Section 1833(b)(3)(A) imposes a notice requirement on employers. It provides that an employer must provide notice of the immunity in any contract or agreement with an employee that governs the use of a trade secret or other confidential information. The employer may satisfy this requirement either by including the notice directly in the agreement or by providing a cross-reference to a policy document that sets forth

Section 925 contains a limited exception: it does not apply to an employee who is individually represented by legal counsel in negotiating the terms of an agreement that includes a choice-of-law or forum-selection provision. As a practical matter, this exception will apply to few, if any, of Lumos's employees, as the existing agreements are template-based and were not individually negotiated. The implication for Lumo

IV. ANALYSIS This section presents our provision-by-provision analysis of the six areas of concern identified in the Executive Summary. For each provision, we describe the existing language, analyze its enforceability under the legal framework set forth in Section III, assess the risk to Lumos, and provide specific recommendations. A. Non-Compete Clause (Critical Risk — Immediate Action Required)

1. Description of Existing Provision. The existing PIIA and employment agreements contain a post-employment non-compete clause that is substantially identical across all four employee tiers. The clause imposes a twelve-month restriction on competitive activity following the termination of the employee's employment with Lumos, regardless of the reason for termination. The restriction applies globally — there is no geo

2. Enforceability Analysis. The non-compete clause is void and unenforceable as to all 142 California-based employees under California Business and Professions Code Section 16600. The analysis is straightforward and does not present a close question.

Section 16600 provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." The existing non-compete clause directly restrains each Lumos employee from engaging in a lawful profession — namely, employment or consulting in the field of data analytics, artificial intelligence, machine learning, or financial technology — for a pe

3. SB 699 / AB 1076 Exposure. Prior to January 1, 2024, the practical consequence of a void non-compete clause in a California employment agreement was limited: the clause was unenforceable, and an employee could seek declaratory relief to have the clause declared void, but the employer faced no affirmative penalty for having included the clause in the agreement (other than potential exposure to claims under Californ

4. Recommendation. We recommend the following immediate actions: (a) Delete the non-compete clause. The twelve-month global post-employment non-compete clause should be immediately deleted from all template agreements. No form of post-employment non-compete restriction should appear in any agreement with a California employee. (b) Send AB 1076 notifications. Lumos should send individualized written notifications to a

1. Description of Existing Provision. The existing agreements contain an eighteen-month post-employment non-solicitation clause that encompasses two distinct restrictions: (a) a prohibition on the solicitation of Lumos employees for purposes of inducing them to leave their employment with Lumos (the "employee non-solicitation" component), and (b) a prohibition on the solicitation of Lumos customers or prospective cus

2. Employee Non-Solicitation. The enforceability of employee non-solicitation provisions under California law is an area of significant uncertainty and ongoing judicial development. California courts have not uniformly addressed the issue, and the trend of recent authority is toward heightened skepticism. Historically, some California courts distinguished between non-compete agreements (which directly restrict a depa

3. Customer Non-Solicitation. The enforceability of customer non-solicitation provisions under California law has evolved substantially in recent years, and the current weight of authority strongly disfavors such provisions. California courts have increasingly treated customer non-solicitation clauses as restraints on trade void under Section 16600. The rationale is that a provision prohibiting a departing employee f

4. Recommendation. We recommend the following revisions to the non-solicitation provisions: (a) Delete the customer non-solicitation clause entirely. For all California employees across all four tiers, the customer non-solicitation clause should be removed in its entirety. The clause is almost certainly unenforceable, and its continued inclusion in the agreements creates unnecessary risk without providing meaningful

1. Description of Existing Provision. The existing invention-assignment clause in the PIIA requires each employee to irrevocably assign to Lumos all right, title, and interest in and to any "inventions, original works, developments, concepts, improvements, designs, discoveries, ideas, trademarks, or trade secrets" (collectively, "Inventions") that are conceived, developed, reduced to practice, or made by the employee

2. Legal Deficiencies. The existing invention-assignment provision is non-compliant with California law in several material respects. Missing Section 2870 Notice. California Labor Code Section 2872 mandates that any employer requiring execution of an invention-assignment agreement must provide a written notification to the employee containing the text of Section 2870. This is a mandatory, non-waivable requirement. Th

3. Significance for Lumos's Business. The deficiencies in Lumos's invention-assignment provisions are not merely technical compliance issues — they pose a material business risk that strikes at the core of the Company's value proposition and enterprise value. Lumos's FY 2023 R&D expenditure of $18.4 million represents approximately 43.5% of the Company's $42.3 million ARR. This level of R&D investment reflects the Co