Rhode Island is the latest state to jump on the bandwagon of limiting the application of non-compete agreements, with its Rhode Island Noncompetition Agreement Act (the “Act”).  See these links for our prior posts explaining the previous six non-compete statues enacted in 2019:  Maine; Maryland; New Hampshire; Oregon; Utah; and Washington.  Rhode Island’s Act becomes effective on January 15, 2020.

Ban on Non-Competes For “Low-Wage Earners”; “Nonexempt” Employees; Minors; and “Undergraduate or Graduate” Student Workers

The Act follows the trend of banning the use of non-compete restrictions for categories of workers who generally do not pose a competitive threat.  Non-compete restrictions “shall not be enforceable against the following types of workers”:

  • “Employees age eighteen (18) or younger”
  • “Undergraduate or graduate students” who participate in an internship or otherwise work—“whether paid or unpaid”—while  enrolled in an “educational institution”
  • “An employee who is classified as nonexempt under the Fair Labor Standards Act”; and
  • “A low-wage employee.”

The Act defines a low-wage employee as an employee whose annual “earnings” are not more than 250% of the federal poverty level for individuals as established by the United States Department of Health and Human Services federal poverty guidelines.”  The Act defines “earnings” to mean “wages or compensation paid to an employee during the first forty (40) hours of work in a given week, not inclusive of hours paid at an overtime, Sunday, or holiday rate.”  The 2019 HHS Poverty Guideline for a household of one person is $12,490.  Accordingly, for purposes of the Act a “low-wage worker” is currently an employee earning up to $600.48 per week ($31,225 / 52), excluding overtime.

The prohibition of non-competes for “nonexempt” employees may have the unintended consequence of prohibiting non-compete restrictions for key sales employees who are nonexempt but nevertheless possess a particular ability to inflict competitive harm.  However, the Act expressly carves out “covenants not to solicit or transact business with customers, clients, or vendors of the employer” as well as “nondisclosure or confidentiality agreements.”

Application to All Non-Compete Restrictions as of January 15, 20120 Regardless Of Date Signed

The Act does not grandfather in non-compete restrictions entered into before a certain date.  The Act simply provides non-competition agreements as defined “shall not be enforceable.”  However, the Act specifically provides that it “does not render void” other permissible restrictions, such as client solicitation restrictions.  The Act also specifically provides that it does not preclude a judicially imposed noncompetition restriction “whether through preliminary or permanent injunctive relief or otherwise, as a remedy for a breach of another agreement or of a statutory or common law duty.”  Accordingly, for example, the Act would not prohibit a court from imposing an injunction for violating Rhode Island’s trade secrets statute prohibiting a former employee from working for a competitor for a period of time.

Carve-Outs for Various Types of Competition Restrictions

The Act does not govern client and vendor solicitation restrictions or confidentiality or non-disclosure agreements, as explained above.  The Act similarly excludes numerous other types of agreements and restrictions from the definition of “non-competition agreement”:

  • Covenants not to solicit or hire employees;
  • Noncompetition agreements made in connection with the sale of a business entity, “or all or substantially all of the operating assets of a business entity, or partnership,” or “otherwise disposing of an ownership interest … when the party restricted by the noncompetition agreement is a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale or disposal” (emphasis added);
  • Noncompetition agreements originating outside of an employment relationship;
  • “Forfeiture agreements,” which the Act defines as “an agreement that imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship, regardless of whether the employee engaged in competitive activities, following cessation of the employment relationship”;
  • Invention assignment agreements; and, interestingly,
  • “Noncompetition agreements made in connection with the cessation of or separation from employment if the employee is expressly granted seven (7) business days to rescind acceptance” and “Agreements by which an employee agrees not to reapply for employment to the same employer after termination of the employee.”

Under the latter exception, noncompetition agreements are permissible in severance agreements so long as, just like the Older Workers Benefit Protection Act requires for terminated employees 40 years of age or older, the employee is provided seven days to revoke acceptance.  The “no reapplication” exception appears targeted to settlements of discrimination charges or claims, which generally impose that requirement on the former employee.  And the terms “substantially” and “significant” in the sale-of-business exception seem fertile ground for litigation over the precise meanings of those terms.

“Forfeiture Agreements” Distinguished From “Forfeiture for Competition Agreements”

The Act’s definition of “forfeiture agreement” appears to refer to agreements under which employees promise to return advance payments, such as moving expenses, which employers commonly pay for under the condition that the employee must repay the amount if they terminate employment within a certain time period.  The Act excludes such agreements from coverage.  However, the Act expressly defines “forfeiture for competition agreements” as an agreement that imposes adverse financial consequences on an employee if the employee engages in competitive activities.  “Forfeiture for competition agreements” are expressly included in the definition of “noncompetition agreements” that the Act now prohibits.

Conclusion

For a small and relatively sparsely populated state, Rhode Island’s Noncompetition Agreement Act has adopted many different aspects of the state laws governing noncompetition that have preceded it, particularly those enacted in 2019.  We expect states that are considering similar statutes to look to Rhode Island for guidance.

David J. Clark
David J. Clark

Last month, two New England states enacted laws restricting the use of non-competition provisions in agreements governing an employment, partnership or other professional relationship of a physician.

Broadly speaking, the aim of both of these laws is to protect patients’ choice regarding medical care by limiting the ability of employers or partners to contract with physicians such that the physicians’ ability to practice medicine would be restricted at the end of the professional relationship.

Effective on July 12, 2016, the new law in Rhode Island (R.I. Gen. Laws §5-37-33) prohibits non-compete language in most physician agreements.  It renders void and unenforceable “any restriction on the right to practice medicine” found in virtually any contract creating the terms of employment, partnership or other professional relationship involving a state-licensed physician.  The new law therefore invalidates non-competition or patient non-solicitation provisions for Rhode Island physicians.  The new law does not apply in connection with the purchase and sale of a physician practice, provided the restrictive covenant is less than five years in duration.

Effective on July 1, 2016, the new law in Connecticut (Public Act No. 16-95) is less sweeping than the Rhode Island law.  Rather than prohibiting physician non-competes, the Connecticut law limits the allowable duration (to one year) and geographical scope (up to 15 miles from the “primary site where such physician practices”) of any new, amended or renewed physician agreement.  The new law also renders physician non-competes unenforceable if the physician’s employment or contractual relationship is terminated without cause.

Rhode Island and Connecticut are the latest in a slowly growing number of states that have taken legislative action to limit the use of physician non-competes.  Their neighbor Massachusetts was an early adopter of such a statute.  Mass. Gen. Laws chapter 112, §12X (enacted in 1977) bars physician non-competes which include any restriction of the right of a physician to practice medicine in any geographic area for any period of time after termination.  Much of the language in the Massachusetts law appears in the recently enacted Rhode Island statute.

Similar language appears in Delaware and Colorado statutes dating from the early 1980s, which state that covenants are void if they restrict the rights of physicians to practice medicine upon termination of the agreements containing the covenants.

More recently, Texas (in 1999) and Tennessee (in 2012) both enacted statutes (as did Connecticut) applying stricter standards to physician non-competes than are applicable to employee non-competes in general, while stopping short of invalidating such physician non-competes.

It remains to be seen if the enactment this summer of these statutes in Connecticut and Rhode Island is merely a coincidence, or foreshadows more state legislatures pursuing such limitations of physician non-competes.

As readers of this blog likely know, many states have entirely different statutory schemes for noncompetes in the healthcare industry. Indeed, while 47 states generally permit noncompetes, more than a dozen expressly prohibit or limit them in certain sectors of the healthcare industry – typically for patient-facing clinicians.

For example, in Massachusetts, noncompetes are not permissible in “[a]ny contract or agreement which creates or establishes the terms of a partnership, employment, or any other form of professional relationship with a physician registered to practice medicine . . . , which includes any restriction of the right of such physician to practice medicine in any geographic area for any period of time after the termination of such partnership, employment or professional relationship.” The same restriction applies to Massachusetts nurses, psychologists, and social workers.

Continue Reading Healthcare Noncompete Laws Get a Checkup in Four States and the District of Columbia

As readers of this blog are aware, many states now require employers to provide prospective employees with copies of any noncompetes (and, in some cases, other restrictive covenants) they will be required to sign as a condition of employment. For example, Massachusetts requires that noncompetes be provided at the earlier of when an offer is made or 10 business days before the first day of employment; in Illinois it is 14 calendar days before employment begins; in Maine it is three days; in New Hampshire and Washington a noncompete must simply be provided before an employee’s acceptance of an offer; in Oregon and Rhode Island it is two weeks before employment begins; and beginning August 9, 2022, Colorado will require not only that both noncompete and non-solicitation covenants be provided to employees at least 14 days before the effective date of employment, but a separate standalone notice must be provided as well.

Continue Reading Advance Notice of Restrictive Covenants May Be Required, but They Should Not Be Executed Before Employment Begins

On March 12, 2019, Dunkin’ Donuts, Arby’s, Five Guys Burgers and Fries, and Little Caesars agreed to stop including “no-poach” clauses in their franchise agreements and no longer to enforce such clauses in existing agreements. A no-poach clause is an agreement between employers not to hire each other’s employees. The franchisors agreed to end this practice following an investigation by a coalition of attorneys general from 14 states into the use of no-poach clauses in fast food franchise agreements.[1] In a press release announcing the settlement, Maryland Attorney General Brian Frosh explained his concern “that no-poach provisions make it difficult for workers to improve their earning potential by moving from one job to another or seeking a higher-paying job at another franchise location, and that many workers are unaware they are subject to these no-poach provisions.”

In addition to the ongoing investigation by the attorneys general, there are also pending several class actions targeting no-poach agreements, including in the United States District Court for the Eastern District of Washington. Interestingly, in some of those actions, the United States Department of Justice (“DOJ”) weighed in on the plaintiffs’ attempted application of federal antitrust law to franchise agreements. In a March 8, 2019 Statement of Interest, the DOJ forcefully argued against the class action plaintiffs’ novel legal theory that no-poach clauses in franchise agreements are per se unlawful under federal antitrust law, thereby allowing courts to find liability in the absence of sophisticated proof of market impact. This filing indicates that while the DOJ remains committed to its 2016 Guidance announcing an increased role for antitrust enforcement in combating anticompetitive employment practices, it is not interested in radically changing basic principles of antitrust law.

In light of these developments, franchisors should review their franchise agreements to ensure they comply with applicable laws, paying particular attention to any no-poaching language in those agreements. Other employers who may have entered into formal or informal no-poach agreements should evaluate the necessity of such agreements in view of the increased scrutiny they are receiving from the government and individual plaintiffs.

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[1] The coalition includes law enforcement officials from Maryland, California, the District of Columbia, Iowa, Illinois, Massachusetts, Minnesota, North Carolina, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, and Vermont.

Many physicians and other health care workers are familiar with restrictive covenants like non-competition and/or non-solicitation agreements, either as employees who have been asked to sign such covenants as a condition of their employment or as business owners seeking to enforce such covenants to protect their medical practices from competition. These covenants are usually designed to prohibit physicians or other practitioners from leaving and setting up a competing practice nearby using patient contacts, information, and/or training that they received during their employment or association with the former employer.

Restrictive covenants generally are regulated by state laws and cases, which can differ markedly from one state to the next. For physicians and some other health care professionals, there can be an additional level of complexity in the analysis of such covenants, because many states, in light of the unique position the medical profession holds in the public interest, apply special rules to covenants that restrict medical practice. Courts considering such covenants may ask whether enforcement will cause a shortage of doctors in a particular area, or within a particular specialty. A paramount consideration usually is the right of patients to obtain treatment from the physician or other health care professional of their choice.

By statute, several states that may allow non-competes generally (provided they are reasonable and protect legitimate business interests) will not enforce them at all against physicians. Massachusetts was an early adopter, in 1977, of a statutory prohibition on physician non-competes. Mass. Gen. Law Ch. 112 § 12X renders void any non-compete provision restricting “the right of a physician to practice medicine in a particular locale and/or for a defined period of time.” In the early 1980s, Delaware and Colorado enacted similar laws. 6 Del. Code Ann. § 2707; Colo. Rev. Stat. § 8-2-113.[1] In 2016, Rhode Island followed suit and enacted a law just like Massachusetts’ statute. R.I. Gen. Laws §5-37-33.

Some other states do not prohibit physician non-competes but apply stricter standards to such agreements than they do to employee non-competes generally. For example, enacted in 2007 and amended several times thereafter, Tennessee’s statute allows physician (including radiologist) non-compete provisions if they: (1) are in writing; (2) last no longer than two years after the physician’s employment is terminated; and (3) either (a) are geographically limited to the greater of the county where the physician is employed or a ten mile radius of the primary practice site; or (b) there is no geographic restriction, but the physician is restricted from practicing at any facility in which the employer provided services during the physician’s time of employment. Tenn. Code Ann. § 63-1-148.

Texas law allows physician non-competes provided that the covenant must: not deny the physician access to a list of the patients seen or treated within one year of termination of employment; provide access to medical records of the physician’s patients upon proper authorization; provide for a buyout of the covenant by the physician at a reasonable price; and allow the physician to provide continuing care and treatment to a specific patient or patients during the course of an acute illness. Tex. Bus. & Com. Code Ann. § 15.50.

A New Mexico statute first enacted in 2015 prohibits provisions in agreements which restrict the right of healthcare practitioners (including physicians, osteopathic physicians, dentists, podiatrists and certified registered nurse anesthetists) to provide clinical healthcare services.[2]  (That limitation does not apply to agreements between shareholders, owners, partners or directors of the practice.) The law, however, does allow non-disclosure provisions relating to confidential information; non-solicitation provisions of no more than one (1) year; and imposes reasonable liquidated damages provisions if the practitioner does provide clinical healthcare services of a competitive nature after termination of the agreement.  In addition, healthcare practitioners employed by the practice for less than three (3) years may be required, upon termination, to pay back certain expenses to the practice, including loans; relocation expenses; signing bonuses or other incentives related to recruitment; and education/training expenses.  N.M. Stat. § 24-1l-1 et seq.

And a Connecticut law enacted in 2016, rather than prohibiting physician non-competes, limits the allowable duration (to one year) and geographical scope (up to 15 miles from the “primary site where such physician practices”) of any new, amended or renewed physician agreement.  The law also renders physician non-competes unenforceable if the physician’s employment or contractual relationship is terminated without cause.  Conn. Gen. Stat. §20-14p(b)(2).

Other states may have, or may be considering enacting, statutes restricting non-competes and related agreements for healthcare providers. The trend is certainly toward limitations on such agreements. Accordingly, consultation with local legal counsel regarding these issues is highly recommended for any person or entity practicing in the healthcare industry.

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[1] Under Delaware and Colorado’s non-compete statutes, physicians can be required to pay damages “reasonably related to the injury suffered” by a breach of any such agreement. The Colorado statute was amended in 2018 to clarify that physicians may disclose their continuing practice and provide new contact information to any of their patients who have a “rare disorder,” and not be subject to claims for damages.

[2] This prohibition was expanded in 2018 to include certified nurse practitioners and mid-wives, and to prohibit the use of choice of forum and choice of law agreements to prevent circumvention of the prohibition.

In 2016, several states enacted laws that were designed, in varying degrees, to limit non-competes, including Illinois, Utah, Connecticut and Rhode Island. Which states are most likely to do the same in 2017?

Idaho:  A bill proposed in January, House Bill 61, would amend an existing Idaho law that has made it easier for employers to enforce non-competes against the highest paid 5% of their employees and independent contractors.  The bill would alleviate the burden placed on such “key” personnel by the existing law by, among other things, eliminating the rebuttable presumption of irreparable harm to the employer that is automatically established if a court finds that the key employee or independent contractor is in breach of his or her non-compete.

Maryland:  On January 27, 2017, Maryland lawmakers proposed House Bill 506, which would render null and void any non-compete provision in an employment contract that restricts the ability of an employee who earns equal to or less than $15.00 per hour or $31,200 annually to enter into employment with a new employer or to become self-employed in the same or similar business. The bill was adopted by Maryland’s House and is now in its Senate.

Massachusetts:  On January 20, 2017, lawmakers proposed Bill SD.1578, which would impose significant limitations on the reach of non-competes in Massachusetts.  If enacted, the proposed law would, among other things:  limit the temporal scope of non-compete agreements to 12 months from the date of termination of employment (or 2 years if the employee has breached his or her fiduciary duty or has unlawfully taken property belonging to the employer); prohibit non-competes against certain categories of workers, including nonexempt employees, students, employees terminated without cause, and employees 18 years or younger; and require non-competes to be supported by consideration independent from the continuation of employment.

Nevada:  A bill proposed in February, A.B. 149, would make a non-compete “void and unenforceable” in Nevada if it prohibits an employee from seeking employment with or becoming employed by a competitor for a period of more than 3 months after the employee’s termination, which is an extremely short duration in the non-compete realm.  Willful violators of the law would be guilty of a gross misdemeanor punishable by a fine of not more than $5,000; in addition, the Nevada Labor Commissioner may impose an administrative penalty of up to $5,000 for each such violation.

New York:  On October 25, 2016, New York Attorney General Eric Schneiderman announced that he planned to introduce legislation in 2017 that would, among other things, prohibit the use of non-competes for low-wage workers and require employers to pay employees additional consideration if they sign non-compete agreements.  While he has not yet introduced this bill, Schneiderman has given no indication that he will backtrack from his 2016 announcement.

Washington:  After a bill that would have, among other things, limited non-competes to one year faced strident opposition from businesses, Washington legislators penned a more watered-down version of a bill designed to make non-compete agreements more transparent.  Specifically, Bill HB 1967, which passed the Washington House on March 8 and is now in the Senate, requires that all the terms of a non-compete contract be disclosed in writing before the employee signs the contract. While this revised bill is far less restrictive than other proposed bills, if enacted, it will nevertheless be beneficial to Washington employees.

Stay Tuned: The Maryland and Washington bills have the most traction, as they have already passed the states’ Houses.  Nevertheless, at this point it is simply too early to predict whether the law proposed in those states or elsewhere will garner enough support to clear the necessary legislative and executive hurdles to be enacted.  In the meantime, employers across all states should stay tuned and continue to draft narrowly tailored and enforceable non-competes.

On October 22, 2009, in a case entitled Astro-Med, Inc. v. Nihon Kohden America, Inc. and Kevin Plant, on appeal from the U.S. District Court for the District of Rhode Island, the First Circuit Court of Appeals affirmed a jury verdict granting Astro-Med, Inc. ("Astro-Med") damages of more than $1 million against Nihon Kohden America, Inc. ("Nihon") and employee Kevin Plant ("Plant") for violating non-compete and non-disclosure clauses which Plant signed when he was first employed by Astro-Med in 2002.

Astro-Med and Nihon were competitors in the life sciences equipment market. In 2002, Astro-Med hired Plant as a Product Specialist at its Rhode Island facility. Upon his hire, he signed an Employment Agreement which contained a non-competition clause and a trade secrets clause. The Agreement was governed by the laws of Rhode Island.

After significant training from Astro-Med, Plant transferred to a Sales Representative position at Astro-Med’s Florida facility. In 2006, Nihon, a California corporation, hired Plant as a Sales Representative in Florida. Shortly thereafter, Astro-Med sued Plant in federal court in Rhode Island for breach of contract, misappropriation of trade secrets and unfair competition. Astro-Med later added Nihon as a defendant, alleging claims including misappropriation of trade secrets. After losing before the jury, both Nihon and Plant appealed to the First Circuit Court of Appeals.

On appeal, Nihon and Plant alleged nine separate claims of legal error, each of which was rejected by the First Circuit. The Non-Competition clause and the Trade Secrets clause stated that Rhode Island law applied. On appeal, Nihon argued that as a California business, it should not be subjected to the jurisdiction of Rhode Island concerning its hiring of a Florida resident to sell its product in Florida. The Appeals Court disagreed, finding that Rhode Island had jurisdiction. It also found that Astro-Med and Plant entered into the agreement in Rhode Island and that Nihon hired away Plant with full knowledge of the agreement. Because Astro-Med was headquartered in Rhode Island, that was one of the places where the harm occurred.

Specifically with respect to the Non-Competition and the Trades Secrets provisions, defendants raised numerous arguments. The two most interesting are discussed below:

First, Nihon argued that the Non-Competition clause that Plant signed when he was first hired at Astro-Med was unenforceable because after Plant signed it, his duties materially changed. It is true that Plant’s job changed at Astro-Med when he transferred to the salesperson job in Florida. Nihon relied on a Massachusetts case (AFC Cable Sys. Inc. v Clisham, 62 F. Supp. 2d 167 (D. Mass. 1999), for the proposition that a change in an employee’s job can void a non-competition clause. Massachusetts case law provides that "each time an employee’s employment relationship with the employer changes materially such that they have entered into a new employment relationship a restrictive covenant must be signed." Lycos, Inc. v. Jackson, No. 2004-3009, 2004 Mass. Super. LEXIS 348 (Mass. Super. Ct. Aug. 24, 2004). After a substantial discussion of the genesis and intent of the Massachusetts decision which turns on the parties’ intent to abandon the non-competition agreement upon the change in duties, the First Circuit held that even if Rhode Island adopted the Massachusetts approach, the facts in the instant case did not support a finding that the parties intended mutual abandonment and rescission of the non-competition provision.

Second, with respect to the Trade Secret Misappropriation claim, relying on Massachusetts common law, Nihon argued that since no evidence was established at trial that either Plant or Nihon ever used any of Astro-Med’s confidential information, there can be no violation. However, the First Circuit, which also hears appeals from Massachusetts, said Nihon’s reliance on Massachusetts law was misplaced. Rhode Island law applied and the Rhode Island Uniform Trade Secrets Act, R.I. Gen. Laws Sect. 6-4-1, et seq. defines "misappropriation" as including disclosure of a trade secret by one who acquired it while under a duty to maintain its secrecy and the acquisition of a trade secret by one who knew it was obtained from someone who had a duty to keep it secret. Under Rhode Island law, it is not necessary to show that either Plant or Nihon used Astro-Med’s trade secrets. The First Circuit noted that disclosure or acquisition is sufficient to prove a misappropriation, subjecting defendants to liability for actual loss and unjust enrichment caused by the misappropriation.

This case illustrates that it is important to check the applicable state law to determine if an individual has violated a restrictive covenant like the Non-Competition or Trades Secrets clauses discussed in this summary. Appellants Nihon and Plant relied on principles from Massachusetts which were different than the applicable law of Rhode Island. The growing Massachusetts case law regarding material changes in employment and the Massachusetts doctrine that misappropriated trade secrets must be used before they can be the subject of an actionable claim, have not been adopted by other states and did not help Nihon and Plant.