On August 10, 2018, the Governor of Massachusetts signed “An Act relative to the judicial enforcement of noncompetition agreements,” otherwise known as The Massachusetts Noncompetition Agreement Act, §24L of Chapter 149 of the Massachusetts General Laws. (That bill was part of a large budget bill, H. 4868, available here; the text of the provisions relevant here at pages 56-62 of the bill as linked). The Act limited non-competition provisions in most employment contexts to one-year and required employers wishing to enforce such a one-year period to pay their ex-employees for the time that such employees are sidelined. The Act also precluded enforcing such provisions against employees laid-off or terminated without cause or against employees classified as non-exempt under the Fair Labor Standards Act. These and the other requirements noted below become effective and apply to employee noncompetition agreements entered into on or after October 1, 2018, and the Act curiously contains some significant exceptions as well. Below we will highlight material aspects of the new law, which was recently featured on Employment Law This Week.

Requirements for Enforcement Start Early

In connection with a non-compete agreement provided to an employee at the start of employment, an employer must provide it to the employee at the time of the offer of employment or ten business days prior to starting employment, whichever is earlier. Act, lines 1282-1291, at page 58-59. (The Act defines such agreements as “an agreement between an employer and employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.” Act, lines 1264-1267, at page 57-58)

For a non-competition agreement presented to an employee during employment, the employer must provide it to the employee ten business days before it takes effect and such an agreement must be supported by “fair and reasonable consideration independent from the continuation of employment.” Act, lines 1287-1297, at page 58-59.

The Act also requires that a non-competition agreement “expressly state that the employee has the right to consult with counsel prior to signing.” Act, lines 1289, at page 59.

Further, the Act applies to all employees and independent contractors working in Massachusetts regardless of whether the agreement has a choice-of-law provision specifying the law of some other jurisdiction applies. Act, lines 1249-51, at page 57. (How it will apply to sales personnel with multi-jurisdiction territories remains to be seen, and its provision purporting to apply its requirements to those who are a “resident of” Massachusetts as opposed to those working there certainly appears one likely to be litigated as well. Act, lines 1346-1349, at page 61.)

The Death of Reasonable Pro-Employer Restrictions In Massachusetts?

The Act certainly requires employers to pay attention. But it preserves many tools for employers to use with employees, so it seems that reports of the death of such restrictions is greatly exaggerated. When employers understand a core of four concepts about the new law, they will be able to structure their approach accordingly.

First and foremost, the Act requires that most non-compete periods be limited to one-year during which the employee receives garden-leave pay or some “other mutually agreed-upon consideration.” Act, lines 1318-1330, at page 60. The Act defines garden-leave pay as payment of at least half of the employee’s highest base salary during the two years preceding the restricted period but it does not define in any way the phrase “other mutually agreed-upon consideration.” Id. The Act also allows the one-year period to be extended to two years and the obligation to pay compensation to vanish where the employee has breached fiduciary duties or has taken property belonging to the employer. Act, lines 1305-1313, at page 59-60. In the end, the Act states that such provisions “must be no broader than necessary to protect one or more . . . legitimate business interests of the employer” but also that “[a] noncompetition agreement may be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative restrictive covenant, including but not limited to a non-solicitation agreement or a non-disclosure or confidentiality agreement.” Act, lines 1298-1304, at page 59.   But the Act also notes that courts may “reform or otherwise revise” such agreements to be consistent with the Act and Massachusetts public policy. Act, lines 1331, at page 60 and Act, lines 1343-1345, at page 61.

Second, the Act precludes enforcement of non-competition agreements against certain classes of employees. An employer may not enforce non-competes against employees who are (i) nonexempt under the Fair Labor Standards Act, (ii) undergraduate or graduate students who are in an internship program or other short-term employment relationship with an employer (whether paid or unpaid) while enrolled in a full-time or part-time undergraduate or graduate educational institution, (iii) under age 18, or (iv) terminated without cause, though “cause” and “without cause” are undefined. Act, lines 1332-1342, at page 61. Still, the Act expressly states that a number of traditional restrictions fall outside its requirements, and may continue to be used by Massachusetts’ employers, including the following as agreements unaffected by the Act:

  • those “not to solicit or hire employees of the employer”
  • those “not to solicit or transact business with customers, clients, or vendors of the employer”
  • those “made in connection with the sale of a business entity or substantially all of the operating assets of a business entity or partnership, or otherwise disposing of the ownership interest of a business entity or partnership, or division or subsidiary thereof, 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”
  • those “outside of an employment relationship”
  • “forfeiture agreements,” which are defined 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 engages in competitive activities following cessation of the employment”
  • nondisclosure or confidentiality agreements
  • invention assignment agreements.

[Act, lines 1268-1281, at page 58.]

Perhaps of greatest interest, employers may still extract longer non-competes “made in connection with the cessation of or separation from employment if the employee is expressly given seven business days to rescind,” which means that noncompetition agreement may be part of a severance agreement. Id. How that will play out where one enters into a severance agreement with one who would otherwise be terminated without cause will prove interesting.

Third, the Act also limits both geographic scope and precludable competitive activities. It does so by limiting scope to those geographic areas employee actually worked in and those services the employee actually provided—during employee’s last two years of employment. This is seen in the statutory language that says “[a] geographic reach that is limited to only the geographic areas in which the employee, during any time within the last two years of employment, provided services or had a material presence or influence is presumptively reasonable” and that “[a] restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last two years of employment is presumptively reasonable.” Act, lines 1310-1317, at page 60.

Fourth, the Act also seems to limit venue to certain specific courts. The Act states that “[a]ll civil actions relating to employee noncompetition agreements subject to this section shall be brought in the county where the employee resides or, if mutually agreed upon by the employer and employee, in Suffolk county; provided that, in any such action brought in Suffolk county, the superior court or the business litigation session of the superior court shall have exclusive jurisdiction.” Act, lines 1350-1354, at page 60-61. The notion of “exclusive jurisdiction” will also likely be the subject of contested claims brought in federal court under the Act.

All Things Considered, I’d Rather Be In ….

As noted at the outset, the Massachusetts Act is a set of significant, material changes for employers. But they are manageable when one understands the full panoply of options that remain open to employers in Massachusetts and takes the time to plan with counsel for the October 1st transition to a new non-compete regime that in fact will continue to include much of what is already in use for sophisticated employers. So, Massachusetts will remain manageable.

A recent decision from an Arkansas appellate court raises two important issues of enforceability of non-competition agreements: (1) the enforceability of a non-compete after expiration of the contractual non-compete period and (2) the applicable standard for determining whether a valid protectable interest exists.

In Bud Anderson Heating & Cooling, Inc. v. Neil, the plaintiff Bud Anderson Heating and Cooling, Inc. (“BAHC”), a HVAC vendor and service provider, appealed a lower court’s denial of BAHC’s petition for a one-year prospective injunction seeking to enforce an expired non-compete agreement with defendant Neil, which was allegedly violated when Neil joined a competitor located within BAHC’s territory and subsequently successfully solicited a BAHC customer.  Before addressing the merits of BAHC’s complaint, the appellate court considered—and ultimately rejected—Neil’s argument that BAHC’s appeal was moot since the injunction sought extended beyond the contract’s one-year-from-date-of-termination period.  In so holding, the court relied on (1) caselaw from other jurisdictions finding that extension of a noncompetition period is within a court’s broad equitable powers and (2) application of the “capable-of-repetition-yet-evading-review exception to the mootness doctrine,” previously unapplied in this context.

Turning to the merits of the appeal, the appellate court found that the trial court should have applied an “able to use,” not an “actual use” standard in determining whether to grant BAHC’s injunction. Under an “able to use standard,” a petitioner need only demonstrate the ability of a former employee to use the former employer’s proprietary information to obtain an unfair competitive advantage; proof that the employee actually used such information is not required.

The Bud Anderson decision is noteworthy in two respects.  First, Arkansas employers may be able to enforce non-competes after expiration of the non-compete period, thereby achieving longer non-compete periods that would ordinarily be deemed by courts unreasonable and invalid.  Second, Arkansas employers seeking to enforce non-competes can take advantage of an “able to use” standard, which is easier to meet than an “actual use” standard.  However, given that the Bud Anderson decision presents not one but two issues of first impression, it would not be surprising if the case were to ultimately end up before the Arkansas Supreme Court.

Notwithstanding these developments in Arkansas, employers should note that other courts have reached different conclusions on both of these issues. As always, it is critical to know the state-specific law in the applicable jurisdiction.

Earlier this month, Colorado amended its law governing physician non-compete agreements (C.R.S. § 8-2-113(3)).  Since its enactment in 1982, that statute generally has prohibited agreements restricting the rights of physicians to practice medicine, but has allowed contractual provisions requiring a physician to pay damages arising from his or her competition if the damages are reasonably related to the injury suffered by the employer or other contracting party.  Under the amended statute, “a physician may disclose his or her continuing practice of medicine and new professional contact information to any patient with a rare disorder…to whom the physician was providing treatment.”   The goal of the amendment is to avoid interruptions to the continued care of individuals with rare disorders.  The statute looks to the National Organization for Rare Disorders, Inc. to maintain a database of diseases considered “rare disorders.”

Colorado physician practices should review and, if necessary, update any restrictive covenants in their physician agreements to ensure they are enforceable under the amended statute, bearing in mind that physicians now have the right to communicate personal contact information to patients suffering from rare disorders. Going forward, to avoid future disputes, physicians and their employers or practices may even wish to agree upon the language departing physicians can use to communicate information regarding their new practice to persons with rare disorders.

Also, any such review of physician agreements should consider the recent Colorado Supreme Court decision limiting the damages physicians’ practices can recover against physicians in breach of their non-compete agreements.

A little-noticed decision from earlier this year rendered by the Supreme Court of New York, Westchester County, demonstrates how enforcement of post-employment restrictive covenants will often boil down to a single question: does the restriction protect a legitimate business interest of the employer?

In Cindy Hoffman, D.O., P.C. v. Raftopol, plaintiff applied for a preliminary injunction against its former employee, a physician’s assistant, who began working for a competitor in technical violation of her past employment non-compete restriction which barred her for two years from working for competitors located within fifteen miles of any of the plaintiff-employer’s several offices.  Plaintiff asked the court to apply relaxed scrutiny to the covenant, arguing that the physician’s assistant position could be considered to be a “learned profession” in which her services performed were unique and extraordinary.  The court declined to apply such deference where the defendant was not in fact a physician.  Examining the two year restriction under New York’s traditional reasonableness standard, the court still was reluctant to enforce it as written.  Instead, Justice Terry Jane Ruderman blue-penciled the agreement and granted the preliminary injunction only to the extent of preventing the defendant from affirmatively soliciting clients of the plaintiff’s practice for a period of two years.

Safeguarding the plaintiff’s client relationships was the true legitimate business interest worthy of protection, and the court was willing to go no further than that in granting its injunctive relief.

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.

Featured on Employment Law This Week: An employer cannot waive its own non-compete agreement to avoid payment, unless the agreement specifically grants it the right to do so.

An employee of a financial services firm in Illinois signed an agreement that required a six-month post-employment non-competition period in exchange for $1 million from his employer. When the worker resigned, the employer sent a notice waiving the agreement and telling the employee that it would not pay him the $1 million. After waiting out the six months, the employee filed suit against his former employer. The Illinois Court of Appeals found that there was no provision in the agreement that allowed the employer to change the terms without consent from the worker, and because the employee upheld his end of the contract, the employer must pay him what is due.

Watch the segment below and see our previous post on this topic.

A bill has been introduced in the New York State Legislature, aiming to clarify the laws of non-compete and non-solicit agreements in New York.

Introduced by Assemblyman Phil Steck on January 15, 2015 and by State Senator Andrew Lanza on March 20, 2015, the bill (A2147/S4447) is entitled “Policy Against Restraint of Trade,” and operates from the premise that the Court of Appeals decision in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999) has led to confusion in the law of non-competes, particularly in the application of a balancing test in which an employer’s interest in enforcing a non-compete or non-solicit covenant is weighed against the employee’s interest in earning a livelihood.

Among other things, if enacted, the bill could render non-competes and non-solicit agreements in New York unenforceable unless they are reasonable in time and/or geographic scope, and only if the employee or independent contractor:

(1) left the business voluntarily and is unique (i.e., possesses trade secrets of the business or confidential information akin to a trade secret);

(2) is the seller of any portion of the business; or

(3) is a “learned professional” other than a lawyer.

The bill currently sits in the Committee on Labor in both chambers of the legislature, and so is a long way from being enacted.  We will monitor and report on any further legislative progress of the bill.

The New York State Supreme Court recently shot down a request to enjoin two former salesmen and their new employer from tortiously interfering with a real estate investment firm’s business, from interfering or contacting its customers or using or exploiting its trade secrets. See Koenigsberg v. Silber Investment Properties Ltd., Index No. 20127/08 (Nassau County March 17, 2009). The two former salesmen claimed that they were not actual employees of the real estate investment firm, but independent contractors, that they did not sign non-compete contracts and that the alleged client lists were their personal property. The plaintiff sought to enjoin the former sales representatives’ solicitation of clients based on its contention they misappropriated trade secrets (i.e., the client lists). In disagreeing with the plaintiff, the Court referred to plaintiff’s prior course of conduct with other former sales representatives. Specifically, the Court pointed out that there was no indication that the plaintiff had prohibited other sales representatives from soliciting clients after they left, had required other sales representatives to sign non-solicitation agreements, or had prevented other sales representatives from keeping their own lists of customers. The Court stated “[i]f AIP did not require that its salespeople guard the secrecy of the customer list during their service with AIP or attempt to prevent the AIP salesmen from using the information in the list once they left AIP’s service, this is an indication that the customer list was not a ‘trade secret.'” The Court further reasoned that the plaintiff failed to set forth “what ‘considerable efforts’ were expended in developing the purported secrets.” Nor did the plaintiff establish how the client list was created.

The case serves as a reminder to employers to take appropriate and reasonable steps to protect their confidential information and trade secrets. Such steps may include limiting access to the confidential information, requiring persons with access to such information to execute written confidentiality and/or non-solicitation agreements, and requiring departing employees to return company property and documents.

Under Florida law, where an employment contract expires by its terms and the parties continue to perform as before, an implication arises that they have mutually assented to a new contract containing the same provisions as the old.

But this principle does not apply to non-competes and other restrictive covenants contained in employment contracts, as illustrated by a recent decision by the Third District Court of Appeal, Zupnik v. All Florida Paper, Inc., Case No. 3D08-1371 (Fla. 3d DCA, Dec. 31, 2008).

Zupnik had signed a two-year employment contract with All-Florida. The contract provided that “during the Employment Term and within twelve (12) months from the termination of said term, he or she will not directly or indirectly … compete against ALL FLORIDA, within a fifty (50) mile radius of where ALL FLORIDA then engages in business[.]” The contract further provided that “[a]t the expiration of this two (2) year contract, the employee can exercise an option to remain in ALL FLORIDA’S employ as an at-will employee.” But the contract did not contain language specifying that the restrictive covenants would continue beyond the two-year term if Zupnik remained an at-will employee after the two-year term expired.

After the expiration of the initial two-year term, Zupnik remained an All Florida employee for an additional two years, but the relationship was not formalized in a written document. Zupnik then formed his own company intending to serve his long-standing customers. All-Florida sued Zupnik and the trial court entered an injunction enforcing the non-competition covenant. The Third DCA reversed. Citing its decision in Sanz v. R.T. Aerospace Corp., 650 So. 2d 1057 (Fla. 3d DCA 1995), the court held that “post-termination restrictions expire upon the termination of an agreement for a specific term, even if an employee remains an at-will employee after the term of the written agreement expires.”

For employers, the Zupnik case highlights the importance of drafting non-competes and other restrictive covenants carefully. Where an employment contract is for a specified term (e.g., two years), employers should include language in the contract which provides that the restrictive covenants contained in the contract continue beyond the specified term if the employee remains an at-will employee after the term has expired.