Maryland recently joined the ranks of states with laws limiting the enforcement of non-compete agreements against low wage workers.  Maryland’s recently enacted law (SB 328) bars employers from enforcing non-compete agreements against workers earning less than or equal to $15 per hour or $31,200 per annum.

In a nod to employers, the statute is carefully worded to protect low wage workers exclusively and “may not be construed to affect a determination by a court in an action involving” an employee whose earnings exceed both $15 per hour and $31,200 per annum.  The statute only bars the enforcement of non-compete agreements (as opposed to other types of restrictive covenants, such as customer or co-worker non-solicitation agreements) and explicitly reserves employers’ right to enforce contracts prohibiting “the taking or use of a client list or other proprietary client-related information.”

The new law takes effect on October 1, 2019, invaliding past contracts as applicable and prohibiting any future agreements.  In the meantime, Maryland employers should consider revising their non-compete agreements to conform to the new law.

This post was written with assistance from Jenna Russell, a 2019 Summer Associate at Epstein Becker Green.

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In its new podcast series, Employment Law This Week has released an extended Monthly Rundown, discussing some of the most important developments for employers in June 2019.

This episode includes:

  • Worker Classification in the Gig Economy
  • NLRB Announces Rulemaking Agenda
  • National Backlash Builds Against Non-Compete Agreements
  • Tip of the Week: Compliance with New Jersey’s Equal Pay Act

Stay tuned: Listen to the latest episode on our website or on your preferred platform – iTunes, Google Play, Soundcloud, or Spotify – be sure to subscribe!

When Massachusetts enacted the Massachusetts Noncompetition Agreement Act (“MNCA”) in mid-2018, many suggested then and thereafter that such statutes reflected an anti-employer tilt in public policy. But we advised at that time that the MNCA in fact appeared to present manageable options for sophisticated employers advised by knowledgeable counsel.   A recent federal court decision from the District of Massachusetts in Nuvasive Inc. v. Day and Richard, 19-cv-10800 (D. Mass. May 29, 2019), supports our earlier read, and belies the notion that Massachusetts courts see the Commonwealth’s policy requiring application of its own law to pre-existing non-competes.  So despite the fear that the statute would eliminate multi-state employers’ ability to rely on more favorable non-Massachusetts law when enforcing restrictive covenants, the Nuvasive court’s result and analysis gives employers hope that such fears were overblown.

In Nuvasive, the court enforced a contractual choice of law clause requiring the application of Delaware law.  In reaching this conclusion, the court noted that Massachusetts law generally gives effect to contractual choice of law clauses unless “the chosen state has no substantial relationship” with the parties or transaction or the application of the chosen law is contrary to the “fundamental public policy of a state” with a materially greater interest.  The court found that Delaware had a substantial relationship with the parties because Nuvasive is incorporated in Delaware.  The court also found that the application of Delaware law would not be contrary to any fundamental public policy of Massachusetts, notwithstanding the changes enacted last year and some existing elements of Massachusetts common law.

In reaching this conclusion, the court, as noted, did not buy the hype.  For instance, the court rejected the argument that the material change doctrine, which requires new restrictive covenants to be executed with each material change in an employment relationship, constituted a fundamental public policy of the Commonwealth.  In addition, the court concluded that applying Delaware law would not violate the MNCA. Although the contract at issue was executed prior to the October 1, 2018 effective date of the MNCA, and hence, not subject to the MNCA, the court assumed that the MNCA reflected the fundamental policy of the Commonwealth.  The court nonetheless found that applying Delaware law would not violate the MNCA. The court emphasized that Delaware law, like the MNCA, required that any restrictive covenant contain reasonable temporal and geographic restrictions, reasonable restrictions on “the scope of prohibited activities” and be “no broader than necessary” to protect trade secrets, confidential information and goodwill.  The court also noted that the agreement at issue was in writing, stated that the employee could consult counsel, and contained a restrictive period that lasted only twelve months after the termination of employment and was no broader than necessary to protect Nuvasive’s legitimate business interests.  Although the agreement did not contain a garden-leave provision obligating the employer to pay the employee during the restricted period, the court found that the agreement was supported by “mutually agreed upon consideration.”  Significantly, the court did not describe the “mutually agreed upon consideration” that supported the agreement, and the agreement itself referenced only compensation and access to Nuvasive’s good will and proprietary information.

So, in the end, despite a new statute that seemed to change significantly the lay of land in the non-compete area, the court did not view it as changing the public policy of Massachusetts.  Public policy in Massachusetts, at least according to the Nuvasive court, does not require garden leave, provided there is some indicia of consideration, and in fact does not even require application of the law of the Commonwealth, provided that the law chosen had some nexus to the parties and is not glaringly inconsistent with the MNCA. Thus, despite the enactment of the MNCA, the court followed standard choice of law rules and applied Delaware law, just as it would have done before last summer.  It is not clear if the court would have applied Massachusetts law, rather than Delaware law, if the contract had been executed after October 1, 2018, or that the application of Massachusetts law would have led to a different result.   So, the more things change (in the statute), the more they stay the same (in the enforcement of pre-existing contracts and application of choice of law rules).

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Pursuant to a recently passed Oregon state law (HB 2992), noncompete agreements entered into on or after January 1, 2020 will only be enforceable against Oregon employees if the employer provides the departing employee with a signed copy of the agreement within 30 days after the employee’s date of termination.  Though at first blush, this law merely codifies the best practice of reminding departing employees of their continuing obligations to their former employer, it contains a few nuances Oregon employers should keep in mind.

The law requires employers to provide departing employees with a signed copy of their noncompete agreement within 30 days after their termination date.  Under a plain text reading of the statute, providing departing employees with a copy of their noncompete agreements on their last day of employment, for example during their exit interview, will not satisfy the statute.  Rather, employers should transmit copies of any noncompete agreements to former employees after their employment has terminated.

Although this requirement only applies to noncompete agreements (as opposed to non-solicitation agreements or garden leave clauses), as a best practice, employers should consider reminding departing employees of all their post-employment obligations.

Oregon employers have some lead-time to develop new procedures to accommodate this new requirement.  The law applies to noncompete agreements entered into on or after January 1, 2020, so preexisting agreements will continue to be enforceable even if the employer neglects to provide the required notice.

Webinar – Wednesday, June 26, 2019, 12:00 p.m. – 1:00 p.m. PDT

California, the Golden State, is a special place to live and work. However, if you are an employer in California, you have most likely heard warnings of what you cannot do in terms of protecting your workforce and trade secrets and preventing unfair competition. While the rules of the road are different in California, employers are not without tools to protect their resources. And those tools are the focus of this program: what you can do to protect your workforce and trade secrets in California.

Join our colleagues Steven R. Blackburn, James A. Goodman, and Peter A. Steinmeyer as they cover the topics of:

  • The art of actively (and actually) protecting your trade secrets
  • How, if at all, does the Defend Trade Secrets Act of 2016 affect trade secret litigation and employee mobility in California?
  • The latest (in terms of technology) on protecting your electronically stored information from being exported from the work environment.
  • The importance of good employee exit procedures
  • Best practices in monitoring competitive damages after an employee departs
  • “Cease and desist” letters in California
  • What is the status of various legal work-arounds that employers have tried in California over the years? Garden leaves, contingent compensation, choice-of-law provisions–are any of them viable?
  • Be ready to go to court—or, more accurately, “how to be ready before you go to court”
  • The latest on restricting former employees from soliciting their former co-workers
  • The ever-present problem: how do you prove damages?
  • Reconciling mandatory arbitration with injunctive relief
  • The surprise new issue: broad nondisclosure agreements being attacked as restraints of trade or violations of various California Labor Code provisions or the National Labor Relations Act

Click here to RSVP for this webinar.

Employers sometimes ask whether it matters if they are inconsistent in their enforcement of non-competes.  Typically, the issue is analyzed in terms of whether inconsistent enforcement undercuts the legitimate business interest justifying the restriction.  However, in a pending lawsuit, Miller v. Canadian National Railway Co., the issue is being raised in a different context: whether alleged inconsistent enforcement was racially motivated.  Specifically, the plaintiff in that case alleges that “[b]y enforcing the non-compete against Miller and not against similarly situated white employees, Defendants are interfering with Miller’s future employment relationships because of his race.”

Enforcement of non-competes rarely comes up in the context of a discrimination claim, but as illustrated by this case, this is another factor of which employers should be aware when considering whether to enforce a restrictive covenant.

Non-competes are going to be harder to enforce in Washington State.  On May 8, 2019, Governor Jay Inslee signed the “Act Relating to Restraints, Including Noncompetition Covenants, on Persons Engaging in Lawful Professions, Trades or Businesses,” which was passed by both houses of the state legislature in April.

The new law will become effective January 1, 2020, and will render unenforceable non-competition provisions signed by employees earning less than $100,000 and independent contractors earning less than $250,000 annually.  Other important provisions of the law are as follows:

  • Any non-competes exceeding 18 months will be considered unreasonable and unenforceable.
  • The law will apply to any claims asserted on or after January 1, 2020 regarding non-competition agreements, even if the agreement was signed prior to that date.
  • Only non-competition provisions are targeted by the law, not provisions regarding solicitation of clients or co-workers, confidentiality or non-disclosure of trade secrets agreements, or covenants entered in connection with the sale of business goodwill or an ownership interest.
  • Employers must disclose the terms of a non-compete to an employee or contractor prior to acceptance of employment.
  • Employers asking existing employees to sign new non-competes must provide independent consideration, e., some additional pay or benefit to which the employees are not already entitled.
  • Employers wishing to enforce non-competes against laid-off employees must pay full base salary throughout the non-compete period (minus compensation earned by the employee through other employment).
  • Employers seeking to enforce non-compliant non-competes can be sued by the employee or the Attorney General, and be ordered to pay the greater of actual damages or $5,000, plus attorneys’ fees and costs.
  • Out-of-state forum selection clause will not be enforced against Washington-based employees or contractors, no matter where the employer is based.

These are big changes to current Washington law governing non-competes.  Businesses with employees or independent contractors in Washington should evaluate all non-competition agreements they may have with such individuals, and take steps to be in compliance with the law by the end of this year.

Tuesday, May 7, 2019
Downtown Chicago Dinner Program

Wednesday, May 8, 2019
Repeat Suburban Lunch Program

Join our colleagues Lauri Rasnick, Kevin Ryan, and Peter Steinmeyer for an interactive panel discussion which will provide insights into recent developments and expected trends in the evolving legal landscape of trade secret and non-competition law. This program will also discuss unique issues and developments in the health care and financial services industry. Our colleagues will also be joined by Thomas J. Shanahan, Associate General Counsel at Option Care.

Issues arising from employees and information moving from one employer to another continue to proliferate and provide fertile ground for litigation. Many businesses increasingly feel that their trade secrets or client relationships are under attack by competitors—and even, potentially, by their own employees. Individual workers changing jobs may try to leverage their former employer’s proprietary information or relationships to improve their new employment prospects, or may simply be seeking to pursue their livelihood.

How can you put yourself in the best position to succeed in a constantly developing legal landscape?

Whether you are an employer drafting agreements and policies or in litigation seeking to enforce or avoid them, you will want to know about recent developments and what to expect in this area.

During this program, the panel will discuss:

  • Legal trends in the enforceability of non-competes
  • New and pending state and federal legislation, including the Massachusetts Noncompetition Agreement Act
  • Recent judicial decisions regarding restrictive covenants, including an important California case concerning provisions barring solicitation of employees
  • New cases and statutes regarding protection of trade secrets
  • Continuing governmental scrutiny of “no poach” agreements and restrictions on low wage workers

To register, click here.

ACC Chicago is an Approved Illinois CLE Provider. 1 General Credit Hour (pending) for this program. Participants seeking MCLE credit need to sign in and provide their Illinois Bar number

Our colleagues Lauri F. Rasnick and Frances L. Kenajian at Epstein Becker Green have a post on the Financial Services Employment Law blog that will be of interest to our readers: “FINRA Issues New Guidance to Member Firms Regarding Customer Communications When Registered Representatives Depart.”

Following is an excerpt:

On April 5, 2019, FINRA published Regulatory Notice 19-10 (the “Notice”) addressing the responsibilities of member firms when communicating with customers about departing registered representatives.  As the Notice indicates, in the event a registered representative leaves a member firm, FINRA aims to avoid any disruption in the service of customer accounts and to ensure that customers can make a “timely and informed choice” about where to maintain their assets. The Notice contains two key points about what is expected of member firms in terms of customer communications when a registered representative departs. …

Read the full post here.

Thomson Reuters Practical Law published a Practice Note co-authored by Peter A. Steinmeyer and Robert D. Goldstein, Members of the Firm, “Hiring from a Competitor: Practical Tips to Minimize Litigation Risk.”  This Practice Note discusses potential statutory and common law claims when hiring from a competitor, the need to identify any existing contractual restrictions a potential new hire may have, how to avoid potential issues during the recruitment process, ensuring the new hire is a “good leaver” during the resignation process, responding to cease and desist letters, and potential pre-litigation settlement concepts.

Following is an excerpt:

In most industries, competition is not limited to battles over customers and clients, but also includes efforts to recruit, employ, and retain the most productive and talented workforce. In fact, many employers consider their employees to be their most valuable asset and vigorously work to prevent competitors from taking that asset. For that reason, litigation between competitors arising out of the recruitment of employees has become increasingly common. When a hiring employer becomes embroiled in such a dispute, the time and expense necessary to defend itself can easily outweigh the benefits of hiring the employee.

Fortunately, there are a number of steps a hiring employer can take to minimize the risk of litigation when recruiting employees from a competitor. This Note provides a number of practical suggestions for recruiting individuals from a competitor and significantly lowering the litigation risk for various associated claims.

Click here to download the full Note in PDF format.