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.
You don’t hear much positive news these days about noncompete agreements. Instead, most national media outlets take cases of extreme abuse and frame them as the norm instead of the outliers that they are. And the national media also often portrays employers in a negative light for allegedly forcing noncompetes on employees who purportedly have no choice in the matter and receive no benefit from the transaction. The data does not bear this out—indeed, according to reputable studies, workers who are presented with noncompetes before accepting jobs receive higher wages and more training, and are more satisfied in their jobs than those who are not bound by noncompetes—but that is beside the point when there is an attention-grabbing story to be written.
Microsoft Corp. announced last week that it is immediately eliminating noncompetes for all employees below the partner and executive levels, including doing away with all existing noncompetes for covered employees. In a June 8, 2022 blog post, Microsoft’s Deputy General Counsel and Vice President of Human Resources said the following:
Empowering employee mobility: Microsoft believes that all employees should be empowered to work at a company they love and in a role where they thrive. We work hard to retain our world-class talent by making people the priority, and creating a culture that attracts and inspires world-class talent to unlock innovation aligned to our mission. While our existing employee agreements have noncompete obligations, we do not endorse the use of such provisions as a retention tool. We have heard concerns that the noncompetition clauses in some U.S. employee agreements, even when rarely and reasonably enforced, feel at odds with our talent principles. With these concerns in mind, we are announcing that we are removing noncompetition clauses from our U.S. employee agreements, and will not enforce existing noncompetition clauses in the U.S., with the exception of Microsoft’s most senior leadership (Partners and Executives), effective today. In practice, what this means is those U.S. employees will not be restricted by a noncompete clause in seeking employment with another company who may be considered a Microsoft competitor. All employees remain accountable to our standards of business conduct and other obligations to protect Microsoft’s confidential information. (Emphasis added).
According to a report in the Wall Street Journal last week, the Federal Trade Commission is considering new regulations to prohibit the use of noncompetes and to target their use in individual cases through enforcement actions. Although President Biden issued a vague Executive Order early in his administration that “encourage[d]” the FTC to “consider” exercising its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility,” no concrete action has been taken to date. That is not entirely surprising given that, until last month, the Commission was split 2-2 along partisan lines. What has since changed that may now make federal noncompete regulation a real possibility, however, is the appointment last month of Alvaro Bedoya to the FTC, giving the Democrats a 3-2 majority.
Lina Khan, the 33-year-old Biden-appointed Chair of the FTC, told the Wall Street Journal, “We feel an enormous amount of urgency given how much harm is happening against the workers. This is the type of practice that falls squarely in our wheelhouse.” Other Commissioners disagree. Commissioner Noah Phillips has said the agency doesn’t have legal authority to impose such rules, and Commissioner Christine Wilson said last year it was “premature” to pass a federal rule because many states had taken their own actions to address noncompetes. Indeed, noncompete regulation has been the province of the states for over 200 years.
We have written recently about legislative action in various states concerning their restrictive covenant laws, including Washington state’s prohibitions on nondisclosure and nondisparagement provisions in employment agreements, a proposal in Connecticut to codify limitations on noncompetes, and a law passed in Colorado that would limit the use and enforcement of noncompetes and non-solicitation provisions. Another state that is considering new noncompete legislation is New Hampshire.
On March 24, 2022, Washington State signed into law the Silenced No More Act (the “Act”), greatly restricting the scope of nondisclosure and nondisparagement provisions employers may enter into with employees who either work or reside in Washington State. Effective June 9, 2022, the Act prohibits employers from requiring or requesting that an employment agreement contain a provision:
not to disclose or discuss conduct, or the existence of a settlement involving conduct, that the employee reasonably believed under Washington state, federal or common law to be illegal discrimination, illegal harassment, illegal retaliation, a wage and hour violation, or sexual assault, or that is recognized as against a clear mandate of public policy….
We wrote recently about a proposed bill that was introduced in the New Jersey State Assembly on May 2, 2022, which would limit certain provisions in restrictive covenants, and a bill that was passed the following day by the Colorado Senate and is expected to go into effect in August that would likewise limit the enforceability of noncompetes and other post-employment restrictive covenants. Not to be left out, members of the Connecticut General Assembly recently introduced House Bill 5249, which would limit the applicability of noncompete agreements in that state as well. The bill is very similar in many respects to the noncompete law passed in 2018 in Massachusetts, and likely borrowed heavily from that law. Here are the details:
We wrote in January about a small change in Colorado law that could have large effects because it criminalized the enforcement of noncompete agreements that violate its general noncompete statute, C.R.S. § 8-2-113. Well, the Colorado General Assembly is at it again. Passed by the Colorado Senate on May 3, 2022, and now awaiting Governor Jared Polis’s signature, HB 22-1317 would further amend C.R.S. § 8-2-113 to substantially limit the enforceability of noncompetes and other restrictive covenants for any workers other than those who are “highly compensated,” as well as imposing new, stringent notice requirements and penalties for noncompliance. This has been a trend nationwide over the past several years with respect to noncompetes, but not other post-employment restrictive covenants. If signed (which Governor Jared Polis is expected to do), the law would go into effect this August, so employers must be ready. Here are the details:
- Post-employment restrictive covenants are presumptively void unless certain conditions are satisfied. Any noncompete or non-solicitation provision executed by a Colorado worker is presumptively void unless the agreement is (a) with a “highly compensated” worker; (b) is for the protection of trade secrets; and (c) is no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting its trade secrets. This is a departure from the previous exception under Colorado law for “executive and management personnel” and their “professional staff”—which was vague and subject to much debate and litigation. Under HB 22‑1317, a “highly compensated” worker for purposes of a noncompete is someone earning at least $101,250 per year (which will be adjusted annually by the Division of Labor Standards and Statistics in the Colorado Department of Labor and Employment). For a customer non-solicitation provision, the worker must earn at least 60% of the “highly compensated” amount when the agreement is signed (so, in 2022, that would be 60% of $101,250, or $60,750), and must also be no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets. There is no reference to employee non-solicits in HB 22-1317, and restrictive covenants entered in connection with the sale of a business are not subject to the new requirements.
- Confidentiality agreements remain valid, but are limited. The bill permits reasonable confidentiality provisions so long as they do not prohibit the disclosure of (a) information arising from the worker’s general training, knowledge, skill, or experience; (b) information that is readily ascertainable by the public; or (c) information that the worker otherwise has a legal right to disclose.
- Physician noncompetes remain prohibited, but with a new caveat. In its current form, C.R.S. § 8-2-113 deems void “[a]ny covenant not to compete provision of an employment, partnership, or corporate agreement between physicians that restricts the right of a physician to practice medicine,” although provisions requiring the payment of damages that are “reasonably related to the injury suffered by reason of termination of the agreement,” including damages “related to competition,” are enforceable. HB 22‑1317 now adds an exception to the damages rule that permits a physician to disclose his or her continuing practice of medicine and new professional contact information to any patient with a “rare disorder” without being subject to damages resulting from that disclosure or from the physician’s subsequent treatment of any such patient.
- Notice requirements. The bill also imposes new notice requirements. Specifically, for new or prospective workers, an employer must provide a copy of the restrictive covenants before he or she accepts an offer of employment; for existing workers, an employer must provide a copy at least 14 days before the effective date of the restrictions, or the effective date of any additional compensation or change in the terms or conditions of employment that provides consideration for the covenant. Moreover, the notice must be (a) contained in a separate written document; (b) written “in clear and conspicuous terms in the language in which the worker and employer communicate”; (c) signed by the worker (separate and apart from the signature required on the restrictive covenant agreement itself); (d) include the agreement containing the restrictive covenant; (e) identify the restrictive covenant agreement by name and state that it contains a covenant that could restrict the worker’s future employment options; and (f) direct the worker to the specific paragraphs of the agreement that contain the restrictive covenants. And workers may request an additional copy of the noncompete once each calendar year, which the employer is required to provide (but not more than once per calendar year).
- Penalties may be imposed for violations of the law. In the event an employer violates the law, it could be liable for actual damages, plus a $5,000 penalty per worker or prospective worker harmed thereby. However, there is a safe harbor provision for any employer that can show a good faith and reasonable basis for believing it was not in violation of the law, in which case a court may reduce or eliminate the penalty.
- Injunctive relief and attorneys’ fees are available to aggrieved workers. Either the state attorney general or a harmed worker or prospective worker may also pursue injunctive relief, and workers and prospective workers may also recover reasonable attorneys’ fees and costs, if they can demonstrate a violation of the law.
- Out-of-state choice-of-law and forum selection provisions are void. If a worker primarily resides or works in Colorado at the time their employment ends, the employer may not require the worker to adjudicate the enforceability of the covenant outside of Colorado. Moreover, notwithstanding any choice-of-law provision to the contrary, Colorado law will govern the enforceability of any noncompete for any worker who primarily resides or works in Colorado. While Colorado courts will no doubt enforce these requirements, it is unclear whether other states will cede their sovereignty to the Colorado General Assembly.
That is one situation where the penalties and injunctive relief provisions of the bill could come into play (in addition to other situations in which the law is violated). These provisions presumably would apply to the prohibition on out-of-state choice-of-law and forum selection requirements, meaning that, unlike some other states that have similar requirements but no enforcement mechanism (e.g., Massachusetts), if threatened with legal action (or if a legal action is filed outside of Colorado) Colorado workers could potentially file a declaratory judgment action in Colorado and ask the Court to declare the choice-of-law and forum selection provisions invalid, fine the employer, enjoin the employer from proceeding out of state, and award the worker his or her attorneys’ fees. This is akin to California’s Labor Code § 925.
Moreover, employers should note that the earlier amendment to C.R.S. § 8-2-113 that criminalized violations thereof would apply to these new amendments—including the choice-of-law and forum selection requirements—meaning that employers could be subject to criminal penalties for not complying with them.
We will continue to track the progress of this bill and others that are currently working their way through state legislatures and will report back with any important updates.
A California Superior Court Judge in Orange County granted an attorneys’ fees award in the amount of $5.8 million to defendant Landmark Event Staffing Services, Inc. (“Landmark”) in Contemporary Services Corporation v. Landmark Event Staffing Services, Inc., Case No. 30-2009-00123939. This ruling reinforces the importance of carefully calibrating litigation strategy in trade secrets misappropriation cases to focus on vindicating legally protectable interests. Trade secrets litigation should not be used merely as an aggressive tactic to stifle a competitor.
In a pending trial in federal court in Boston in the case U.S. v. Haoyang Yu, et al., prosecutors accuse a design engineer and naturalized citizen from China of stealing microchips (monolithic microwave integrated circuits or “MMICs” used in radio, cellular and satellite communications) from his former employer Analog Devices, Inc. As reported in Law360, during opening statements last week, a federal prosecutor told the jury, “It’s a story of fraud. It’s a story of possession of stolen trade secrets. It’s a story of illegal exports and immigration fraud.” In support of its case, the government explained that Yu tried to cover his tracks by changing the file extensions of the stolen files to “.jpg,” making them appear as if they were standard photo files, and then renaming the files after Pokémon characters, including Pikachu. Yu’s attorney vehemently denied the charges on behalf of his client, arguing, among other things, that “It’s perfectly legal to copy MMICs,” and that Yu has been unfairly targeted as part of the U.S. Department of Justice’s now-defunct “China Initiative.” We are continuing to follow this case and will report further on any interesting developments.