The District of Columbia is bracing for a transition.  But while employers across the country wait to see what changes the Biden Administration may bring, Washington, D.C. employers should prepare for a drastic and imminent change in their own backyard.

As we previously reported, last month the District of Columbia Council passed the Ban on Non-Compete Agreements Amendment Act of 2020 (D.C. Act 23-563) (the “Act”).  On January 11, 2021, Mayor Bowser signed the legislation. It will now be sent to Congress for the congressional review period set forth by the Home Rule Act.  Absent Congress passing and the President signing a joint resolution of disapproval, which is unlikely to happen, the law will take effect after 30 legislative session days and publication in the D.C. Register, and apply upon inclusion of its fiscal affect in an approved budget and financial plan.

As a reminder, under the Act, all D.C. employers are prohibited from requiring or requesting that an employee sign any agreement containing a non-compete provision.  Nor may they implement a workplace policy that prohibits an employee (1) being employed by another person, (2) performing work or services for pay for another person; or (3) operating their own business.  The ban applies to most employees, with medical specialists who have completed a medical residency and earn at least $250,000 annually being one of the few exceptions. Notably, non-compete agreements entered into before the Act goes into effect will still be enforceable.  The Act also includes a notice requirement and provides strong anti-retaliation protections for employees who refuse to agree or fail to comply with an unlawful non-compete provision or workplace policy.  For further analysis and a detailed summary of the Act, please see our December 22, 2020 article.

While we will continue to monitor the Act throughout the congressional review period, D.C. employers who are considering entering into non-compete agreements with their applicants or employees should do so now so that they remain enforceable after the Act takes effect.

Please contact one of the authors or another EBG attorney for assistance with appropriate restrictive covenants under the circumstances.  Assuming Congress does not intervene, the authors are planning a webinar to explain the Act and answer questions.

In the past month, the U.S. Department of Justice (DOJ) has made good on its 2016 threat, contained in its Antitrust Guidance for Human Resource Professionals (“Antitrust Guidance”) to bring criminal charges against people or corporations who enter into naked wage-fixing agreements or naked no-poach agreements.   First, as reported here, on December 9, 2020, DOJ obtained an indictment against the president of a staffing company who allegedly violated Section 1 of the Sherman Act by conspiring with competitors to “fix wages” paid to physical therapists (PT) and physical therapist assistants (PTA).  Although not mentioned in the indictment, a related Federal Trade Commission (FTC) complaint alleged that the defendant agreed with competing staffing companies to lower wages after a client unilaterally lowered the rates paid to the defendant for PT and PTA services.  On January 7, 2021, DOJ announced a second indictment, which alleged that two corporations operating outpatient medical care facilities violated Section 1 of the Sherman Act by reaching “naked no poach agreements” with two competitors, pursuant to which they agreed not to solicit each other’s “senior-level employees.”

Both indictments allege that the employers entered into purportedly “naked” wage-fixing and no-poach agreements, which are illegal per se, and thus are “deemed illegal without any inquiry into [their] competitive effects.”  If the courts allow DOJ to proceed on the illegal per se theory, this will significantly lighten the government’s burden of proof because it assumes the anticompetitive and unlawful character of the agreement.  In civil enforcement cases and statements of interest, DOJ has consistently argued that no-poach and wage-fixing agreements are illegal per se.  Although DOJ has obtained several consent decrees which indicate that such agreements are illegal per se, civil cases generally resolve through settlement, and as the 2019 decision in In re Railway Ind. Employee No-Poach Litigation (W.D. Pa No. 18-798) recognizes, the law on this issue remains unsettled.  Thus, these criminal cases may provide a vehicle for setting standards to determine when wage-fixing and no-poach agreements are “naked” and whether such agreements are illegal per se or subject to the rule of reason analysis.

The indictments also serve as cautionary tales for HR and other executives.  They demonstrate that employers should exercise care in their communications about recruiting and compensation practices because both indictments demonstrate the role of electronic communications to prove the alleged agreements.  The wage-fixing indictment quoted several text messages, exchanged between the lone defendant and unindicted co-conspirators which allegedly resulted in an agreement to suppress wages.  The no-poach indictment also relied extensively on email communications, including internal communications between defendants’ employees, as well as communication between defendants and unindicted co-conspirators, such as competitors and recruiters.  Significantly, the majority of communications cited in the no-poach indictment occurred long before DOJ’s Antitrust Guidance, and thus indicate that DOJ will rely on such earlier conduct to bolster a prosecution.  Accordingly, employers should review their hiring and compensation practices to ensure that they comport with DOJ’s Antitrust Guidance and should amend any guidance that does not.

In addition, anyone who receives a civil investigative demand or grand jury subpoena from DOJ, or an inquiry from the FTC, concerning an antitrust violation should immediately consult counsel.  The Antitrust Division’s Leniency Program allows corporations and individuals who first “self-report” antitrust violations and “fully cooperate” with any DOJ investigation to avoid criminal prosecution.  Such self-reporting and cooperation should always be done with the guidance of counsel, as there are always risks associated with communicating with any government investigative agency.   Indeed, the second count of the price-fixing indictment alleges that the defendant violated 18 U.S.C. § 1505 by making misleading statements and withheld documents during the course of the related FTC investigation.  Promptly consulting counsel may help avoid or limit liability.

Finally, the upcoming change of administration is not likely to dampen DOJ’s enthusiasm for pursuing antitrust enforcement actions against employers. To the contrary, DOJ brought several civil enforcement actions against employers during the Obama Administration and as reported here, President-elect Biden has indicated that he favors eliminating “non-compete and no-poach agreement that do nothing but suppress wages.”  Of course, not every agreement is impermissible.  Even DOJ has recognized that no-poach agreements may be permissible in the context of legitimate joint ventures and in December 2020, DOJ filed an amicus brief that recognized that agreements between franchisors and franchisees are reviewed pursuant to a functional analysis.  Thus, the legality of agreements depends on the particular facts and circumstances.  Nonetheless, DOJ’s back-to-back indictments indicate that employers and recruiters should proceed with caution.  The time is ripe to review recruitment and compensation practices and communications, and to consult counsel to update them as necessary.

Our colleagues Peter Steinmeyer and Brian Spang have co-authored an article in Law360, titled “Trade Secrets Law 25 Years After PepsiCo Disclosure Case.” (Read the full version – subscription required.)

Following is an excerpt:

Twenty-five years ago, the U.S. Court of Appeals for the Seventh Circuit issued what many at the time perceived as a landmark decision, PepsiCo Inc. v. Redmond, in which the court applied the concept of inevitable disclosure of trade secrets to affirm an injunction prohibiting a senior executive from taking a similar position at a direct competitor.

The decision did not invent the phrase or concept of inevitable disclosure as a theory of trade secret liability. But the publicity given to the decision led many to think that the doctrine of inevitable disclosure could be an alternative to, or backstop for, traditional post-employment noncompetition agreements.

Notwithstanding expectations at the time, PepsiCo has not in fact widely changed the landscape of trade secret law and employee mobility injunction practice. Although the doctrine remains alive and well and continues to be applied in appropriate circumstances, it is no substitute for a well-crafted garden leave clause or post-employment noncompetition agreement. …

We’re pleased to share the 2021 update of “Non-Compete Laws: Connecticut,” a Q&A guide published by Thomson Reuters Practical Law.

Following is an excerpt (see below to download the full version in PDF format):

This Q&A addresses enforcement and drafting considerations for restrictive covenants such as post-employment covenants not to compete and non-solicitation of customers and employees. Federal, local, or municipal law may impose additional or different requirements. …

In particular, this Q&A addresses:

    • Overview of State Non-Compete Law
    • Enforcement Considerations
    • Blue Penciling Non-Competes
    • Choice of Law Provisions
    • Reasonableness of Restrictions
    • Remedies
    • Other Issues

Click here to download the PDF: “Non-Compete Laws: Connecticut.”

Thomson Reuters Practical Law has released the 2021 update to “Preparing for Non-Compete Litigation,” a Practice Note I co-authored with Zachary Jackson.

See below to download the full Note – following is an excerpt:

Non-compete litigation is typically fast-paced and expensive. An employer must act quickly when it suspects that an employee or former employee is violating a noncompete agreement (also referred to as a non-competition agreement or non-compete). It is critical to confirm that there is sufficient factual and legal support before initiating legal action. Filing a complaint for monetary damages or a request for an injunction can backfire if an employer is not prepared with sufficient evidence to support its request. This Note discusses the steps an employer can take to best position itself for successful enforcement of a non-compete and the strategic considerations involved with initiating non-compete litigation.

In particular, it discusses:

    • Best practices for investigating a suspected violation and gathering relevant evidence.
    • Key steps for evaluating the likelihood a court will enforce a non-compete.
    • Factors to consider before initiating legal action.
    • The options for enforcing a non-compete through legal action and the key decisions relevant to each option.

Click here to download the PDF: “Preparing for Non-Compete Litigation.”

Earlier this month, the U.S. Department of Justice (“DOJ”) announced that a federal grand jury in Texas indicted Neeraj Jindal, the former owner of a physical therapist staffing company, in connection with an illegal wage-fixing conspiracy to depress pay rates for physical therapists (“PTs”) and physical therapist assistants (“PTAs”) who travel to patients’ homes or assisted living facilities in the greater Dallas-Fort Worth area.  The indictment was something of a landmark for the U.S. Department of Justice (“DOJ”), which for years had promised that such criminal prosecutions were forthcoming in connection with its ongoing investigations of illegal no-poach and wage-fixing agreements by employers.

In October 2016, during the closing weeks of the Obama Administration, the DOJ and the Federal Trade Commission (“FTC”) issued a remarkable document, entitled Antitrust Guidance for Human Resources Professionals, which outlines an aggressive policy, promising to investigate and punish employers, and even individual Human Resources employees, who enter into unlawful agreements concerning recruitment or retention of employees.  As stated in that document, “[a]n agreement among competing employers to limit or fix the terms of employment for potential hires may violate the antitrust laws if the agreement constrains individual firm decision-making with regard to wages, salaries or benefits; terms of employment; or even job opportunities.”

In the past four plus years, the Antitrust Division of the DOJ has announced on many occasions, via press releases, in congressional hearings or otherwise, that no-poaching and wage-fixing agreements among competing employers are an enforcement priority.  The DOJ did bring one well-publicized civil suit regarding no-poaching, and filed some “statements of interest” in pending civil class actions.  But it had filed no such criminal prosecutions – until December 9, 2020, when it secured the indictment of Mr. Jindal.

The indictment asserts two counts against Mr. Jindal: (1) an “antitrust conspiracy: price-fixing” violation of section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and (2) obstruction of investigative proceedings before the FTC for making false and misleading statements and withholding information.  The DOJ alleges that Mr. Jindal and his co-conspirators agreed to pay lower rates to certain PTs and PTAs, and that Mr. Jindal’s company did pay lower rates, from around March 2017 to around August 2017.  The indictment describes numerous text messages to and from Mr. Jindal concerning the wage-fixing conspiracy.

The indictment of Mr. Jindal serves as a reminder to employers that the DOJ and FTC will not hesitate to challenge unlawful wage-fixing and no-poach agreements, anticompetitive non-compete agreements, and the unlawful exchange of competitively sensitive employee information, including salary, wages, benefits, and compensation data.  Employers who are considering collaborating with others or making changes to their employee pay rates, policies and plans therefore would be wise to proceed with caution, keeping an eye on the antitrust laws and DOJ/FTC Guidance.

Non-compete agreements may all but disappear from the Washington, D.C. employment landscape in 2021.  On December 15, 2020, the District of Columbia Council voted 12-0 to approve the Ban on Non-Compete Agreements Amendment Act of 2020 (B23-0494) (the “Bill”), which would prohibit the use and enforcement of non-compete agreements for all employees except certain highly paid physicians.  If enacted into law, Washington, D.C. will have adopted a much stricter policy than several other states  that have recently restricted the use of non-compete agreements—including its neighbors Maryland and Virginia.  The Bill is currently awaiting approval by the Mayor before, absent a veto, it is sent to Congress for the required 30-days of session Congressional review period.

Non-Compete Agreements Prohibited

The Bill prohibits all D.C. employers from requiring or requesting employees to sign any agreement containing a non-compete provision, or implementing a workplace policy that prohibits an employee from (1) being employed by another person, (2) performing work or services for pay for another person; or (3) operating their own business.  This ban applies to all employees except volunteers, casual babysitters, certain members of religious organizations, as well as licensed physicians who have completed a medical residency and earn at least $250,000 annually (“medical specialists”).

A non-compete is broadly defined in the Bill as “a provision of a written agreement between an employer and an employee that prohibits the employee from being simultaneously or subsequently employed by another person, performing work or providing services for pay for another person, or operating the employee’s own business.”  This definition appears to render illegal anti-moonlighting provisions and other workplace policies that prohibit outside employment.  Significantly, however, confidentiality agreements that protect an employer’s trade secrets and other proprietary information (e.g., client lists) are excluded from the ban.  There is also a carve-out for non-compete agreements entered into simultaneously with the sale of a business, so a buyer of a business may insist that the seller refrain from competing with the buyer.  The Bill does not address non-solicitation agreements, so such provisions appear to remain unaffected.

All covered non-compete provisions contained in agreements entered into after the Bill takes effect will be void and unenforceable.  Pre-existing non-compete agreements appear to be grandfathered in and will continue to be enforceable.

Anti-Retaliation Protections

The non-compete law would also prohibit employers from taking or threatening to take any adverse action against employees who refuse to agree or fail to comply with an unlawful non-compete provision or workplace policy.  Employers will also be prohibited from retaliating against an employee who asks questions or complains about a non-compete the employee reasonably believes is barred by the law.

Notice Requirement

Washington, D.C. employers will be required to provide the following notice:

“No employer operating in the District of Columbia may request or require any employee working in the District of Columbia to agree to a non-compete policy or agreement, in accordance with the Ban on Non-Compete Agreements Amendment Act of 2020.”

Covered employees must receive this notice within 90 days after the law’s effective date.  Thereafter, the notice must be provided to all new employees within 7 calendar days of their start date, and within 14 calendar days of any covered employee’s written request.

Requirements for Medical Specialists

Although employers may still seek a non-compete provision as a condition of employment for physicians making at least $250,000, the prospective employee must receive the proposed non-compete provision at least 14 days before execution of the agreement.   Moreover, employers must provide medical specialists with the following notice at the same time as providing the proposed the non-compete provision:

“The Ban on Non-Compete Agreements Amendment Act of 2020 allows employers operating in the District of Columbia to request non-compete terms or agreements (also known as “covenants not to compete”) from medical specialists they plan to employ. The prospective employer must provide the proposed non-compete provision directly to the medical specialist at least 14 days before execution of the agreement containing the provision. Medical specialists are individuals who: (1) perform work on behalf of an employer engaged primarily in the delivery of medical services; (2) hold a license to practice medicine; (3) have completed a medical residency; and (4) have total compensation of at least $250,000 per year.”

Employers may not retaliate or threaten to retaliate against covered physicians who request this notice.  Similarly, the Bill prohibits retaliation against a covered physician who informs the employer, a coworker, their lawyer, or a government agency about any conduct prohibited under the law.

Enforcement and Penalties

Employers who violate the non-compete law may face both administrative and civil liability.  The Bill permits the Mayor’s office or the D.C. Attorney General to fine employers $350-$1,000 for each violation of the non-compete or notice provisions, and the government may assess fines of more than $1,000 for any instances of retaliation.  In addition, individuals who feel that their rights have been violated may file a complaint with the Mayor’s office or a civil court action to seek additional relief of at least $500 for each violation and at least $3,000 if the employer is a repeat offender.

Looking Ahead to 2021

Although recruiters and employees may cheer the Bill, Mayor Muriel Bowser has expressed concern that prohibiting non-compete agreements may introduce “a heightened level of uncertainty into [the D.C.] business climate” that could harm the city’s economic recovery from the COVID-19 pandemic.  However, given that the D.C. Council passed the Bill with a veto-proof majority, even if the Mayor vetoes it the non-compete ban will become law unless Congress passes and the President signs a joint resolution of disapproval before the end of the 30-day Congressional review period.  Considering the upcoming transition to a new Administration and Congress, a joint resolution of disapproval appears unlikely.  Therefore, even though the Bill may be delayed by a veto/formal override and lack of Congressional session days, employers operating in Washington, D.C. should get a head start on reviewing their standard employment agreements and employee policies, and remove all non-compete provisions and other prohibitions on simultaneous outside employment.  Moreover, employers who would like to enter into enforceable non-compete agreements with their applicants or employees should consider doing so now before this Bill becomes law.

Please contact one of the authors or another EBG attorney to discuss appropriate restrictive covenants under the circumstances.

In a case with significant ramifications for employers concerned with protecting sensitive information, and for employees accused of abusing access to computer networks, the United States Supreme Court (“SCOTUS”) heard oral argument this week in Van Buren v. United States, No. 19-783, a case from the Court of Appeals for the Eleventh Circuit that will require interpretation of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030.  The argument was lively.  All of the Justices asked questions, and several expressed concern about vagueness in the CFAA’s definition of covered activity.  Much of the discussion centered on an alleged “parade of horribles,” and on the meaning of the word “so.”  We expect a relatively prompt decision.  Time will tell what SCOTUS will decide, but we would not be surprised to see a reversal and remand.

The CFAA has been a useful litigation tool for employers when confidential or other sensitive information accessed via computer is misappropriated, misused, or otherwise compromised. The CFAA generally prohibits obtaining sensitive information from a computer without authorization, or by exceeding authorized access, and, importantly, confers federal jurisdiction.  While it is a criminal statute, it also provides for a private right of action for those damaged by certain violations.  The issue now before SCOTUS in Van Buren is whether the CFAA is violated when someone with authorized access obtains information for an unauthorized purpose.  For example, when an employee who is authorized to access and use the employer’s computer-stored customer information for business purposes downloads the information to a thumb drive and shares it with a potential new employer, s/he plainly violates company policy.  But does s/he run afoul of the CFAA? Over time, a Circuit split has developed regarding this issue.

Van Buren is a criminal case in which Petitioner Nathan Van Buren, a police sergeant in Cumming, Georgia, was convicted of violating the CFAA.  The Eleventh Circuit affirmed his conviction and SCOTUS granted certiorari.  Briefly stated, as part of his duties Van Buren was granted authorized access to a database containing license plate and vehicle registration information maintained by the Georgia Crime Information Center (“GCIC”).  Training materials supplied to those with access to the GCIC database quite reasonably prohibit use of the database for personal purposes.  However, in return for cash payments, Van Buren agreed to, and did, use his authorized GCIC username and password to access a woman’s license and registration information in order to learn personal information about her on behalf of another individual.  There is no dispute that such use was not within the GCIC guidelines for authorized use. Accordingly, Van Buren used his authorized access to the GCIC database for an unauthorized purpose.  He was charged with, among other things, violating the CFAA.  He was convicted of the CFAA violation, sentenced to 18 months in prison, and he appealed.  The Eleventh Circuit court upheld the conviction, holding, based on precedent within the Circuit, that the unauthorized use of authorized access does constitute a violation of the CFAA.

Because Van Buren was not an outsider or other unauthorized user hacking into the GCIC database, his conviction under the CFAA turns on application of the facts to the CFAA’s prohibition on “exceeding authorized access.” The CFAA defines “exceeds authorized access” to mean “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.”  18 U.S.C. 1030(e)(6) (emphasis added).  Generally, the First, Fifth, Seventh and Eleventh Circuits construe the definition broadly, finding CFAA violations against employees, for example, who access information they are entitled to obtain for certain purposes, but do so for unauthorized uses.  In other words, courts in those Circuits tend to focus on the purposes of authorized access and require computer users to stay within those purposes in order to avoid violations of the CFAA.  This interpretation would allow an employer to bring an action under the CFAA against an employee who, for example, misappropriates sensitive business information s/he was entitled to access as part of his or her job for use with a subsequent employer.  The Second, Fourth and Ninth Circuits, on the other hand, favor a narrower interpretation, in which there is no violation unless the accessed information at issue is, itself, not information the user is entitled to obtain or access at all.  Under that construction, an employee who obtains information from a database s/he is not otherwise permitted to use (e.g. restricted Human Resources information by someone not within the permitted sphere) would violate the CFAA while someone who misuses information s/he is otherwise entitled to access would not.

Van Buren is the first case to present the issue to SCOTUS.  Petitioner, with robust amici support from organizations like Reporters Committee for Freedom of the Press, National Whistleblower Center and technology companies, largely focused his arguments on the dangers of a “parade of horribles” that could arise from the broader interpretation. (See, e.g., Oral Argument at 8).  Petitioner posited that, for example, computer users who check Instagram on their work computers in violation of their employer’s computer use policies, or those who inflate their characteristics on a dating site, in violation of the stated terms of use of such sites, could be guilty of a federal crime should the Government choose to prosecute.  (Oral Argument 4, 22).  He argued that the CFAA is impermissibly vague and that any changes should be left to Congress.

The Government’s position that the CFAA should be broadly read was also supported by several amici, including the Electronic Privacy Information Center and the Digital Justice Foundation.  The Government contended that, pursuant to the definition, a user “exceeds authorized access” by accessing information that s/he did not have a right to access in the particular manner or circumstances used.  Thus, Van Buren violated the CFAA, according to the Government’s position, because he accessed the GCIC under circumstances other than for law enforcement purposes.  As part of its argument, the Government closely examined the meaning of the word “so” in the definition of “exceeds authorized access,” and contended that a person is “entitled so” to do something only when s/he has a right to do it in the particular manner or circumstance authorized.  Brief for the United States at 13.  Van Buren, on the other hand, contended that “so” refers only to “access[ing] a computer with authorization” such that an individual does not “exceed authorized access” if entitled to access the database in question at all. (Oral Argument at 21).

The questions from the Justices during oral argument closely followed those competing themes, further discussing the proper construction of the word “so,” and examining whether some of the more innocuous-sounding activities would actually constitute violations of the CFAA under the broader construction.  Some expressed concern about the privacy of the public if the CFAA is not construed to encompass, for example, government employees reviewing private information for purposes other than those called for in their jobs.  Oral Argument at 14.  Based on the overall tenor of the argument, SCOTUS may be prepared to agree with the more narrow interpretation currently favored by the Second, Fourth and Ninth Circuits, and to overturn Van Buren’s criminal conviction that turned on the broader interpretation. In any case, we will watch for a decision.

We observe use of the CFAA in civil cases to already be diminished in the last four years.  Passage of the Defense of Trade Secrets provides access to federal courts in circumstances where the CFAA was used to create federal jurisdiction.  And as explained above, use of the CFAA in such cases has been curtailed in several Circuits. It will be interesting to see whether the SCOTUS decision in Van Buren further restricts its utility.

The Court of Appeals for the Sixth Appellate District of Texas at Texarkana issued an opinion on November 24, 2020 in Titan Oil & Gas Consultants LLC v. David W. Willis and RIGUP, Inc., a case addressing application of a non-competition provision in the independent contractor context in the oil and gas drilling and production industry in the Permian Basin and elsewhere. Titan addressed non-competition claims of interest both to those focused on the Texas arcana of the state’s restrictive covenant statute and jurisprudence and to those more generally interested in applying restrictive covenants to independent contractors.  Each area of interest is worth examining.

A. Tex. Arcana Around The State’s Restrictive Covenant Statute And Jurisprudence Explained

First, let’s look at the Texas law issues.  Texas covenants not to compete are governed by TEX. BUS. & COMM. CODE Section 15.50(a):

(a) Notwithstanding Section 15.05 of this code, and subject to any applicable provision of Subsection (b), a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

Texas courts have read this as requiring “two inquiries: ‘[f]irst, we determine whether there is an ‘otherwise enforceable agreement’ between the parties, then we determine whether the covenant is ‘ancillary to or part of’ that agreement.’” [citations omitted] and then the court must determine that “the covenant not to compete is ancillary to or part of an otherwise enforceable agreement.” Titan Op. at 9-10.  Thus, “’the employer must establish both that (a) the consideration given by the employer in the agreement is reasonably related to an interest worthy of protection and (b) the covenant not to compete was designed to enforce the employee’s consideration or return promise in the agreement.’…’Unless both elements of the test are satisfied, the covenant cannot be ancillary to or a part of an otherwise enforceable agreement, and is therefore a naked restraint of trade and unenforceable…The covenant cannot be a stand-alone promise from the employee lacking any new consideration from the employer.’” Titan Op. at 9-10.

To do that analysis, the Titan court relied principally on Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), and Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642 (Tex. 1994).  The latter, Light, had illuminated the requirements, holding that:

in order for a covenant not to compete to be ancillary to an otherwise enforceable agreement between employer and employee: (1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer’s interest in restraining the employee from competing; and (2) the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement. Unless both elements of the test are satisfied, the covenant cannot be ancillary to or a part of an otherwise enforceable agreement, and is therefore a naked restraint of trade and unenforceable.

[Light, 883 S.W.2d at 647]

In the former case, Marsh, 354 S.W.3d at 774-777, the Texas Supreme Court muddied the analysis by arguably eliminating, perhaps, the first (or “give rise”) element of Light’s test, according to the Titan Court (at 11-13).  But the Titan Court concluded that it need not settle that debate, as the second, “covenant must be designed to enforce the employee’s consideration” prong was still a requirement after Marsh, and Titan could not satisfy that necessary element. Id.

B. The Titan Non-Compete Clause Falls Short

While the factual reasons that the Titan clause fell short of the Marsh/Light requirements were important under Texas law, they may also point to issues employers, staffing agencies, prime contractors, and others who place independent contractors may face even outside Texas.  In Titan, the defendant, David Willis, was contacted directly by Titan’s customer, Apache Corporation, and solicited to join one of its “completions” teams, and then during the engagement Apache provided its confidential information and needs directly to Willis without Titan acting as intermediate, conduit or guarantor of confidentiality.  According to the Court’s opinion, Titan’s connection was an afterthought: “Rather, the undisputed evidence shows that Apache contacted Willis to be a part of its completions team and that Titan subsequently contacted Willis to carry his insurance and administrate payroll while he worked at Apache. Thus, Willis did not gain access to Apache and its confidential information through Titan or because of Titan’s relationship with Apache.” Titan Op. at 16.  As the Titan Court noted, “This is not a case where in exchange for a promise not to disclose confidential information, the employer expends money and resources to provide the employee with specialized training or the employee gains access to the employer’s clients and their confidential information because of the employer’s relationship with its clients.” Id.

While Titan’s contract appeared to have all the right boilerplate language, arguments based on such language lost steam when the facts revealed that Titan was not the source or conduit of referral or confidential information, had not added defendant to its approved contractor list, and had never presented defendant’s credentials to any other Titan customer or client. Titan Op., at 16; see also id. at 4, fn, 2-3 and accompanying text.  Whether inside or outside Texas, and whether one is dealing with employees or independent contractors, documenting the company’s role in providing such workers the actual work opportunity and the ability to fulfill it remains important to justifying the enforcement of such restrictive covenant.  That is true in states like Texas with formal statutory linkage requirements and in purer common law jurisdictions where judges seek evidence showing employers or prime contractors have provided real value, access and opportunity rather than having just sought to curtail competition as a matter of contractual course.

The 2020 update to our Practice Note, “Garden Leave Provisions in Employment Agreements,” is now available from Thomson Reuters Practical Law.  We discuss garden leave provisions in employment agreements as an alternative or a companion to traditional employee non-compete agreements.

Following is an excerpt (see below to download the full article in PDF format):

In recent years, traditional non-compete agreements have faced increasing judicial scrutiny, with courts focusing on issues such as the adequacy of consideration, the propriety of non-competes for lower level employees, and whether the restrictions of a non-compete are justified by a legitimate business interest or are merely a tool used to suppress competition.

Momentum continues at the state level to pass laws restricting non-competes in various ways. Several states have passed legislation essentially banning non-competes for low-wage workers. Other states have limited noncompetes for other categories of workers, such as technology sector workers and medical professionals. Massachusetts passed comprehensive non-compete legislation in 2018 that limits the enforceability of most non-compete agreement (see Statutorily Required “Garden Leave”). In other states, such as California, almost all post-employment non-competes are unenforceable (Cal. Bus. & Prof. Code § 16600-16602.5). …

Against this backdrop, employers are seeking alternatives to traditional non-competes to protect their proprietary information and customer relationships. One alternative is the use of garden leave provisions in employment agreements. Garden leave provisions extend the employment relationship for a period of time during which the employee continues to receive a salary (and sometimes benefits) but cannot go to work elsewhere.

While garden leave provisions are not a panacea, they may serve as a helpful tool that employers can use to protect their legitimate business interests and prevent certain employees from immediately working for a competitor.

This Practice Note addresses:

  • The history and general characteristics of garden leave in the US.
  • Comparisons between traditional non-competes and garden leave provisions.
  • Advantages and disadvantages of garden leave.
  • Drafting considerations for employers that want to use garden leave provisions, including potential issues under:

–– Section 409A of the Internal Revenue Code (Code); and

–– the Consolidated Omnibus Budget Reconciliation Act (COBRA).

Download the full Practice Note in PDF format here.