Non-Compete Agreements

In managing workforces, particularly when addressing employee turnover, employers often find themselves facing issues regarding how best to safeguard their confidential business information and how to protect their relationships with clients and employees. In recent years, the legal landscape underlying these issues has been evolving, as lawmakers and judges grapple with the tension in these matters between protection and free competition.

In this Take 5, we examine recent developments, both in the courts and legislative bodies, concerning trade secrets and employee mobility:

  1. Antitrust Action Against No-Poaching Agreements: The Trump Administration Continues Obama Policy
  2. Drafting “Garden Leave” Clauses in Employment Agreements
  3. Will Insurance Cover a Company Sued in a Trade Secrets Lawsuit?
  4. Defend Trade Secrets Act Developments in 2017
  5. New and Proposed State Statutes and Federal Legislation Limiting Non-Compete Agreements

Read the full Take 5 online or download the PDF.

Of the various types of post-employment restrictions imposed on employees, a restriction on the recruitment of former co-workers (sometimes referred to as a “no-poach” or “anti-raiding” clause) is the type most likely to be enforced by a court. As a result, this is one type of post-employment restriction that is frequently drafted without the careful thought generally put in to traditional non-competes and client non-solicitation clauses.  But in what could be a foreshadowing of closer judicial scrutiny of co-worker non-solicitation clauses nationwide, the Wisconsin Supreme Court recently held that the Wisconsin non-compete statute applies to such clauses, and that the particular clause in question was unenforceable because it was not “reasonably necessary for the protection of the employer.”

Specifically, in Manitowoc Company v. Lanning, 2018 WI 6 (Jan. 19, 2018), the Wisconsin Supreme Court ruled that Wisconsin’s non-compete statute, Wis. Stat. § 103.465, broadly applies to restrictions on competition, including post-employment restrictions on the ability to solicit former co-workers.  In Lanning, the defendant, an engineer and former employee of the plaintiff, resigned and immediately began working for the plaintiff’s direct competitor. Defendant did not have a non-compete agreement but he did sign an employment agreement that included a non-solicitation clause that prohibited him from soliciting or inducing any employees from the plaintiff’s company to join a competitor within the two-year period following his resignation. After joining the competitor, defendant allegedly began to recruit employees to join the competitor company. Plaintiff argued that the defendant’s actions violated the non-solicit provision and sued him. The Wisconsin Supreme Court held that the non-solicitation provision was an unreasonable restraint on trade which failed to meet the statutory requirement that the restriction “be reasonably necessary for the protection of the employer.”

Wis. Stat. § 103.465 sets forth five requirements that must be met for a restrictive covenant to be enforceable. The restraint must: “(1) be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive as to the employee; and (5) not be contrary to public policy.”

Here, the court looked to several factors when determining that the non-solicit provision was an unreasonable restriction on trade, including the fact that the provision contained no limitation based on the employee’s position, no limitation based on the employee’s “familiarity with or influence over a particular employee,” and no geographical limitation. The company argued that the provision was written to protect the company’s “investment of time and capital involved in recruiting, training and developing its employee base from ‘poaching’ by a ‘former employee who has full awareness of the talent and skill set of said employee base.’” The Court rejected this claim, instead determining that the provision was overbroad and restricted competitors’ access to the labor pool.

This case sends a message to employers that all types of post-employment restrictions on employees, even those which are not traditional non-compete agreements, should be drafted narrowly to protect legitimate business interests of the company, and should be no broader than necessary.

Several states in recent years have enacted laws that have been designed, in varying degrees, to limit non-competes, including California, Illinois, and Nevada. Which states and cities are most likely to do the same in 2018?

The New Hampshire and New York City legislatures have introduced bills that seek to prohibit the use of non-compete agreements with regard to low-wage employees. Under New Hampshire’s Bill (SB 423), a “low-wage employee” is defined as one who earns $15.00 per hour or less.  The New Hampshire Bill was introduced on January 24, 2018 and is scheduled for a hearing in February.  Under New York City’s bill (Introduction 1663), a “low-wage employee” means all employees except for manual workers, railroad workers, commission salesmen, and workers employed in a bona fide executive, administrative, or professional capacity whose earnings are in excess of $900 dollars a week. In addition, the New York City Bill would prohibit employers from “requir[ing] a potential employee who is not a low-wage worker to enter into a covenant not to compete, unless, at the beginning of the process for hiring [the employee], [the] employer disclos[es] in writing that [the employee] may be subject to such a covenant.”  The New York City Bill was introduced by the City Council on July 20, 2017 and filed on December 31, 2017.

Other more sweeping proposals to restrict the use of all non-compete agreements have been introduced in Pennsylvania and Vermont.  The scope of Vermont’s Bill (HB 556) appears to be broader than Pennsylvania’s and prohibits, with exceptions, any agreement “not to compete or any other agreement that restrains an individual from engaging in a lawful profession, trade, or business.” HB 556 was introduced on January 3, 2018 and is currently in Committee.  Pennsylvania’s Bill (HB1938) prohibits (also subject to some exceptions), an agreement between an employer and employee that “is designed to impede the ability of the employee to seek employment with another employer.” The Bill includes provisions that would award attorneys’ fees and damages (including punitive damages) to those employees who prevail in litigation against an employer concerning the non-compete. HB 1938 also would require that any litigation involving a resident of Pennsylvania be decided in a Pennsylvania state court under Pennsylvania law.  The Pennsylvania Bill was introduced and referred to Committee on November 27, 2017.

Massachusetts and Washington have also introduced legislation that would add requirements for employers seeking to use non-compete agreements. In Massachusetts, six separate bills have been introduced, three of which (HB 2371, SB 840, and SB 1017) would require employers to include a “garden leave clause” (or “other mutually agreed upon consideration”) in the non-compete agreements.  The garden leave clause would require employers to pay former employees, on a pro rata basis, either 50 percent (under HB 2371) or 100 percent (under SB 840 and SB1017) of their earnings for the duration of the restricted period.  The Massachusetts Bills were introduced and referred to Committee on January 23, 2017.  In Washington, lawmakers recently introduced a bill (HB 1967) which would require employers to “disclose the terms of the [non-compete] agreement in writing to the prospective employee no later than the time of the acceptance of the offer of employment or, if the agreement is entered into after the commencement of employment, the employer must provide independent consideration for the agreement.”  Additionally, HB 1967 would allow an employer to recover actual damages, statutory damages of $5,000, and attorneys’ fees and costs if an employer requires an employee to sign a non-compete agreement that contains provisions that the “employer knows are unenforceable.”  The Washington Bill was introduced in the House on February 2, 2017 and now is in Committee in the Senate.

At this point it is too early and difficult to predict whether the proposed laws will garner enough support to clear the necessary legislative and executive hurdles to be enacted. Sometimes state bills seeking to restrict the use of non-competes fail to gain enough traction.  Indeed, in 2017 both Maryland’s HB 506 and New Jersey’s SB 3518 died in their respective legislative houses soon after being introduced; Massachusetts especially has a track record of introducing bills intended to limit the use of non-compete agreements that fail to become laws.  Of the bills still in play, the Washington bill is furthest along and seems like it may get passed, though it too may die in Committee.  In any event, employers across all states (and in these states especially) should stay tuned and continue to draft narrowly tailored and enforceable non-competes.

On October 20, 2016—just about three weeks before the presidential election won by Donald Trump—the Department of Justice and the Federal Trade Commission issued a remarkable document, entitled “Antitrust Guidance for Human Resources Professionals,” which outlined 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.”

For over a year, a question on the minds of many practitioners was whether the Antitrust Guidance document and policy would remain a priority for the DOJ and FTC under President Trump.  Those agencies had not issued public pronouncements, and there was uncertainty over whether conduct like wage-fixing and no-poaching agreements would continue to warrant serious civil or criminal scrutiny.  Would the new administration continue the Obama Administration’s antitrust guidance initiative or would it lean more toward a more laissez-faire, do-not-interfere with corporate management philosophy?

We may now have the answer.  The Trump administration has voiced support of this Obama-era policy.  On Jan. 19, 2018, U.S. Assistant Attorney General for the Antitrust Division Makan Delrahim remarked at a conference that if employers have engaged in no-poaching or wage-fixing agreements since the issuance of the policy, their actions will be treated as criminal.  He noted the Antitrust Division has “been very active” in reviewing potential violations, and that, “[i]n the coming couple of months, you will see some announcements, and to be honest with you, I’ve been shocked about how many of these there are, but they’re real.”

Employers and practitioners should stay tuned for these announcements from the Antitrust Division.

Epstein Becker Green attorneys Peter A. Steinmeyer, Robert D. Goldstein, and Brian E. Spang are pleased to be presenting 2017 Year in Review: Trade Secrets and Non-Compete Developments webinar on Wednesday, December 6, 2017 from 1:00 p.m. — 2:15 p.m. with Practical Law.

This webinar will provide insights into recent developments and expected trends in the evolving legal landscape of trade secrets and non-competition agreements. This webinar will focus on how to navigate this continually developing area and effectively protect client relationships and proprietary information.

Topics will include:

  • A review of recent developments and litigation trends under the Defend Trade Secrets (DTSA) since its enactment in 2016.
  • Newly passed state statutes addressing restrictive covenants, including who can enter into them, industry restrictions, and temporal restrictions.
  • Increased usage of “garden leave” clauses in lieu of non-competes.
  • Recent decisions regarding restrictive covenants, including whether a LinkedIn “invitation to link” is an improper solicitation.
  • Significant recent trade secret cases, including the level of detail required when pleading the existence of a trade secret.
  • Administrative agency developments regarding confidentiality clauses, including shifting agency trends under the Trump administration.
  • When are employers actually filing suit against former employees?

Click here for more information and to register for the webinar.

The Florida Supreme Court ruled last week that referral sources in the home healthcare industry can be protected legitimate business interests under the state law governing non-compete agreements, thus finding enforceable such a restriction on a former marketing employee who left for a competitor.

Although the Florida statute in question (542.335) does not specifically list “referral sources” as one of the five categories of business interests subject to protection, the Court notes that those enumerated categories are prefaced by the phrase “including, but not limited to” thereby finding that the list is not meant to be exhaustive and may necessarily include other interests which may justify enforceability of a non-compete agreement.

As is often the case in properly reasoned restrictive covenant decisions, Courts must necessarily engage in fact and industry specific determinations when finding whether the restrictions are necessary to protect a legitimate business interest of the former employee or if they are merely anti-competitive by preventing a former employee from fairly earning a livelihood in their chosen industry.  The Florida Supreme Court went through such analysis here finding that the principal responsibility of marketing representatives of home health service companies was to cultivate relationships with referral sources such as doctors, case managers and referral coordinators in the hope of securing future patient referrals.  Such companies specifically train their representatives to target such referral resources and provide them with access to internal databases of referral source preferences, strategies, and procedures for them to utilize.  This investment in their employees and referral source databases was sufficient to establish a protectable legitimate business interest under the Florida non-compete statute warranting enforcement of the restrictive covenant in question.

When: Thursday, September 14, 2017 8:00 a.m. – 4:30 p.m.

Where: New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Immigration
  • Global Executive Compensation
  • Artificial Intelligence
  • Internal Cyber Threats
  • Pay Equity
  • People Analytics in Hiring
  • Gig Economy
  • Wage and Hour
  • Paid and Unpaid Leave
  • Trade Secret Misappropriation
  • Ethics

We will start the day with two morning Plenary Sessions. The first session is kicked off with Philip A. Miscimarra, Chairman of the National Labor Relations Board (NLRB).

We are thrilled to welcome back speakers from the U.S. Chamber of Commerce. Marc Freedman and Katie Mahoney will speak on the latest policy developments in Washington, D.C., that impact employers nationwide during the second plenary session.

Morning and afternoon breakout workshop sessions are being led by attorneys at Epstein Becker Green – including some contributors to this blog! Commissioner of the Equal Employment Opportunity Commission, Chai R. Feldblum, will be making remarks in the afternoon before attendees break into their afternoon workshops. We are also looking forward to hearing from our keynote speaker, Bret Baier, Chief Political Anchor of FOX News Channel and Anchor of Special Report with Bret Baier.

View the full briefing agenda and workshop descriptions here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions. Seating is limited.

It is fairly uncommon for a circuit court to opine on the reasonableness of a restrictive covenant. In Ag Spectrum Co. v. Elder, No. 16-3113, 2017 U.S. App. LEXIS 14128 (8th Cir. Aug. 2, 2017), the Eighth Circuit issued a decision holding that an independent contractor’s non-compete was unreasonable and unenforceable.

Applying Iowa law, the Eighth Circuit explained that reasonableness depends on the circumstances, including consideration of several factors such as: (1) the employee’s closeness to customers; (2) the employee’s peculiar knowledge gained through employment that provides a means to pirate the customer; (3) the amount and sophistication of employer-provided training and the nature of the business; and (4) matters of basic fairness. The Court stated that the fundamental goal is to prevent unjust enrichment.

In this case, Ag Spectrum’s 3-year noncompete provision with independent contractor Vaughn Elder was unreasonable for three reasons:

First, it was not reasonably necessary to protect Ag Spectrum’s business (selling fertilizer, nutrients and crop-management services). Essentially, like any ordinary reseller, Elder purchased Ag Spectrum product and sold it at a markup. Ag Spectrum did not offer any special training and support, and Elder’s knowledge of Ag Spectrum’s product did not give him an advantage after he left his arrangement with the company. Importantly, as an independent contractor, Elder made and developed his own contacts.   In such a situation, the noncompete allowed Ag Spectrum not to protect a proprietary customer base, but instead to capture customers that Elder himself had provided.

Second, the provision burdened Elder out of proportion to the benefit to Ag Spectrum because enforcing the provision would have required him to rebuild his customer base from scratch. Although Elder conceivably could have sold noncompeting products to his same customers or sold competing products to new customers, such a workaround would have been unreasonable given how little protectable benefit Ag Spectrum had in the parties’ independent-contractor relationship.

Finally, there was no evidence that restricting Elder’s business would harm the public.

Accordingly, the Eighth Circuit held that requiring Elder to forsake the customers that he had brought to Ag Spectrum as an independent contractor would be unreasonable under the circumstances, and thus the noncompete was unenforceable.

Featured on Employment Law This Week – An Illinois appellate court weighs in on social media and solicitation. The case involved a defendant who sent LinkedIn connection requests to three former coworkers, even though he had signed a non-solicit agreement. In considering whether social media activity violates non-solicitation agreements, other courts have drawn a distinction between passive social media activity and more active, direct activity. Though these requests were made directly to the former coworkers, the court in this case ruled that the content constituted passive activity because the defendant did not discuss his new job in any way, nor did he directly attempt to recruit his former coworkers. The court concluded that sending the connection requests did not violate the prohibition against inducing co-employees. Brian Spang, from Epstein Becker Green, has more:

“This particular agreement only prohibited direct inducement. It prohibited the employee from inducing other employees to leave. It could have and should have included a restriction against both direct and indirect inducement. This is important because the court pointed out in multiple places that the plaintiff did not present any evidence of ‘direct’ inducement. . . . I think that a non-compete or non-solicit agreement can specifically reference social media as a potential avenue for violation of the agreement.”

Watch the segment below and read our recent post on the topic.