In what may be a trend, several courts around the country this year have embraced strict interpretations of non-compete agreements, refusing to blue pencil or equitably reform overbroad or unreasonable clauses in non-compete agreements. Traditionally, courts have exercised the doctrine of equitable reformation to re-write provisions to render them reasonable, or at the very least, strike unreasonable provisions to save those that are reasonable.
Our firm’s Executive Comp Exchange blog recently added a post that is useful to employers who utilize confidentiality provisions in any of their employment documents. The blog post addresses the complications of confidentiality provisions of employee agreements and perceived constraints on the employee’s ability to report relevant information or conduct to certain government agencies. The National Labor Relations Board and now the SEC appear to be ramping up efforts to address what they believe are undue restraints by employers in this area.
Once again, the Massachusetts legislature took on non-compete reform, and once again, came up empty-handed. On July 31, 2016, the legislature adjourned without reaching a compromise to alter the state’s non-compete landscape. Earlier this summer, both the House and the Senate passed contrasting versions of non-compete reform bills, but ultimately could not come to agreement on several important provisions. Their inability to reach a compromise reveals once again that this is a complex issue with many stakeholders, and not one susceptible to end-of-the-session compromise.
In the first half of 2016, we have already seen significant changes to a number of state non-compete laws. In this post, we provide a compilation of recently enacted legislation in Alabama, Connecticut, Idaho, Oregon, and Utah, as well as several important developments at the federal level.
Against this nationwide backdrop, there is non-compete legislation pending in Massachusetts that would be of greater consequence than any of these other state measures. Two proposed bills, Bill H. 4434 and Bill S. 2418, would severely curtail the use of non-competes in the Commonwealth, potentially placing strict duration and consideration requirements on any non-competes signed by Massachusetts-resident employees. The final product, in one form or another, should come out of the legislature later this month. Continue Reading
Last week, the Illinois Attorney General filed suit against Jimmy John’s, alleging that the company’s non-competes violate state law. These non-competes prohibit all employees, including sandwich makers, from working during their employment and for two years afterward at businesses within several miles of any Jimmy John’s nationwide that earn more than 10% of their revenue from submarine or similar sandwiches. The complaint alleges that the non-competes do not protect a legitimate business interest such as trade secrets or customer relationships, and it seeks a declaratory judgment that the agreements are unenforceable.
Typically, lawsuits challenging non-competes are brought by aggrieved employees or prospective employers rather than a state Attorney General. The Illinois Attorney General’s novel approach to bring this action under the state’s Consumer Fraud and Deceptive Business Practices Act is yet another example of the increased scrutiny that non-competes have received recently from courts, legislatures, and other government entities. The recent White House report on non-competes specifically highlights non-competes imposed on low-wage workers and others unlikely to possess trade secrets as a problematic use of the agreements. In that same vein, the recently proposed Massachusetts legislation would prohibit non-competes for hourly employees. Of note with respect to the debate over the Massachusetts legislation is that the opponents of non-competes regularly trumpet the Jimmy John’s restrictive covenants as one of their prime examples of unfair non-competes.
As states continue to struggle with the pros and cons of non-competes, the White House has recently weighed in, siding largely with critics of non-competes. In Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses, the Obama Administration draws on a recent report from the U.S. Treasury Office of Economic Policy to provide an overview of research on the effects of non-competes as well as states’ efforts to limit their negative effects.
The White House Report acknowledges that non-competes have economically and socially beneficial uses such as protecting trade secrets and incentivizing investment in worker training. However, the Report notes that these agreements also may have detrimental effects by limiting worker mobility and inhibiting innovation. Specifically, the Report highlights ways in which workers may be disadvantaged by non-competes, including:
- Low-wage workers and others unlikely to possess trade secrets may be forced to sign non-competes;
- Workers may be asked to sign a non-compete only after accepting a job offer, when their bargaining power is reduced;
- The implications and enforceability of non-competes are often unclear to workers;
- Employers requiring non-competes often do not provide consideration beyond continued employment; and
- Non-competes may be enforceable even against workers fired without cause.
The Report concludes that although non-competes may play an important role in protecting businesses and encouraging innovation and investment in employees, they can also impose significant costs on workers, consumers, and the economy.
The Report marks the Obama Administration’s second recent foray into the realm of non-competes and trade secrets. The President recently signed into law the Defend Trade Secrets Act of 2016 (DTSA), which provides for the first time a federal civil remedy for the misappropriation of trade secrets, as discussed in detail by our IP colleagues. Although state legislators primarily hold the power to adopt non-compete reform, the Report indicates that the Obama Administration plans to continue to offer guidance in this area.
Earlier this week, the Joint Committee on Labor and Workforce Development released proposed amendments to the Uniform Trade Secrets Act, which would include the creation of the Massachusetts Noncompetition Agreement Act. The legislation, if enacted, would significantly alter the non-compete landscape, rendering unenforceable or practically unworkable most Massachusetts employers’ non-competition agreements. Here are some of the highlights: Continue Reading
In the last few weeks, Utah and Idaho have each passed bills changing the landscape of non-compete enforceability in strikingly different ways. Utah’s law places further limitations on the use of non-competes. In contrast, the Idaho bill (expected to be signed by the governor shortly) permits greater enforceability of non-competes.
Utah Imposes New Restrictions on Non-Competes and Employers
On March 22, 2016, the Utah “Post-Employment Restrictions Act” was signed into law. This bill makes two main changes to Utah non-compete law:
- It limits the length of non-competes entered into on or after May 10, 2016 to one year after employment ends; and
- It provides that if an employer seeks to enforce a non-compete that is determined to be unenforceable, then the employer is liable for costs associated with arbitration, attorney fees and court costs, and actual damages.
The statute contains exceptions for non-solicitation agreements, non-disclosure agreements, severance agreements, and non-competes relating to the sale of a business.
Idaho Adopts Employer-Favorable Presumption of Irreparable Harm
The neighboring state of Idaho went in another direction just days later. House Bill 487 was delivered to the governor on March 25, 2016 and is expected to be signed into law. The bill provides:
If a court finds that a key employee or key independent contractor is in breach of an agreement or a covenant, a rebuttable presumption of irreparable harm has been established. To rebut such presumption, the key employee or key independent contractor must show that the key employee or key independent contractor has no ability to adversely affect the employer’s legitimate business interests.
Thus, in contrast to the new Utah law, the new Idaho bill will actually make it easier for employers to get a preliminary injunction to enforce their non-compete restrictions.
These changes serve as reminders for employers that statutory and common law rules governing non-competes vary widely from state to state, and they must monitor developments in any states where they have headquarters or employees. These contrasting pieces of legislation also demonstrate that the debate over the pros and cons of non-competes that is taking place in seemingly every state will continue to result in remarkably different outcomes. Non-compete laws remain very much a local affair.
In Meschino v. Frazier Industrial Co., Civil No. 15-10327-RGS, 2015 WL 7295463 (D. Mass. Nov. 18, 2015), Judge Stearns held that an employment agreement superseded an earlier employment agreement and a separate earlier confidentiality and non-compete agreement. A 2005 employment agreement provided that the employee would be required to execute a separate confidentiality and non-compete agreement. The employee executed both agreements in 2005. Notably, the separate confidentiality and non-compete agreement was not expressly incorporated into the 2005 employment agreement, and the employment agreement did not contain an integration clause indicating that it was the final and complete agreement regarding the terms of employment.
This morning, House Speaker Robert DeLeo announced at a Greater Boston Chamber of Commerce breakfast that the House will be releasing a bill this session that imposes some limitations on non-competes. Although the language of the proposed bill is not yet available, Speaker DeLeo described two key elements:
- Time Limit: The proposed bill would limit non-competes to 12 months in length.
- Notice Requirement: The proposed bill would require that employers inform employees in advance that they will be asked to sign a non-compete, and advise them of their right to seek legal counsel.