Brazilian Courts Set Standards For Enforcement Of Non-Compete Agreements

On April 20, 2018, Jackson Lewis published an article entitled, “Brazilian Labor Courts Continue to Emphasize Importance of Non-Compete Clause Limitations,” by John Sander and Maya Atrakchi in the New York City office.  John currently serves as Chairman of L&E Global, a global alliance of premier employer’s counsel firms.  Our colleague Gabriela Lima Arantes at the Brazil law firm Tozzini Freire, a member of L&E Global, co-authored this article.  Through L&E Global, Jackson Lewis can assist with international employment law issues, including in the area of non-compete, trade secrets and unfair competition law.

Readers are encouraged to follow this link to learn more about L&E Global Alliance, or contact your favorite Jackson Lewis attorney for further information.

Massachusetts Legislature Pushes Forward With Amended Non-Compete Bill

This Blog has previously covered the six non-compete bills that were introduced in the Massachusetts Legislature in 2017 (See articles dated December 27, 2017, and March 2, 2018). On April 17, 2018, the Joint Committee on Labor and Workforce Development submitted a revised bill, House Bill 4419 (“H 4419”), in place of the prior bills.  Through this action, the Joint Committee has taken a significant step toward the finish line regarding proposed non-compete legislation.

This post offers some quick impressions following our initial review of the bill.

Definition of Employee

Resolving a split among the 2017 bills, H 4419 proposes to include independent contractors under the definition of a covered “employee.”

Consideration

Like all contracts, non-compete agreements must be supported by valuable consideration. H 4419 provides that non-compete agreements presented to an employee after the commencement of employment must be supported by additional consideration over and above continued employment.  Further, while the bill does not impose a similar requirement for agreements that are entered into in connection with the commencement of employment, no employer may enforce a non-compete covenant without complying with the bill’s “garden leave” provision (see below).

Permissible Scope of a Non-Compete Covenant

Under H 4419, a non-compete covenant must be no broader than necessary to protect a legitimate business interest; must include a geographic scope that is reasonable “in relation to the interests protected”; must not exceed one year in duration from the date of separation (with tolling up to one additional year if the employee is found to have breached a fiduciary duty or unlawfully taken his or her former employer’s property); and must be reasonable in the scope of the proscribed activities in relation to the interests protected.

Requirement of Garden Leave Pay or Some “Other Mutually-Agreed Upon Consideration”

Like three of the 2017 bills, H 4419 requires the payment of “garden leave” or some “other mutually-agreed upon consideration” whenever an employer chooses to enforce a non-compete covenant following the date of separation (for a more in depth discussion of the “garden leave” concept, see our article dated December 27, 2017). For agreements that call for “garden leave” pay (as opposed to “other … consideration”), the employer must, during the restricted period, continue paying the former employee an amount defined as “at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination.”

H 4419 diverges from the 2017 garden leave bills by imposing no requirements on the value or timing of any “other” consideration that the employer and employee may agree upon as an alternative to garden leave. Under the 2017 bills, the value of the alternative consideration needed to be equal to or greater than the statutorily-defined garden leave payments.  Further, the timing of the consideration needed to be in line with the applicable garden leave period.

H 4419 imposes no such conditions, and, as such, appears to allow parties to agree to less valuable consideration which could be provided to the employee at any time, including the commencement of employment (for instance, a hiring bonus). This “other mutually-agreed upon consideration” provision effectively negates any requirement that the non-compete contain a garden leave clause, and may be a sticking point for certain legislators as the bill makes its way through the legislative process.

Exempt Employees

Under H 4419, non-compete agreements may not be enforced against the following types of employees:

  • Employees who are classified as non-exempt under the Fair Labor Standards Act;
  • Undergraduate or graduate students who are engaged in short-term employment;
  • Employees who have been terminated without cause or laid off; or
  • Employees who are not more than 18 years of age.

Blue-Penciling Permitted

H 4419 permits courts to “reform or otherwise revise” an overly broad non-compete covenant to the extent necessary to protect the applicable legitimate business interests. Of note, most of the 2017 bills would have rendered overly broad covenants null and void.

Effective Date

Finally, barring any further revisions, H 4419 would take effect on October 1, 2018 if it is ultimately enacted. Further, any agreements entered into prior to that date would be governed by Massachusetts common law standards.

Conclusion

According to the Legislature’s bill scheduling calendar, H 4419 has a July 31, 2018 deadline for passage. Although summer is close, this should afford sufficient time to get it to a vote.

For further guidance about the pending bill, please contact a non-compete attorney in Jackson Lewis’s Boston Office, including Erik Winton, Stephen Paterniti or Sarah Herlihy.

Utah And Idaho Enact Employee-Friendly Amendments To Non-Compete Legislation

In the past week, two states have made modifications to their respective non-compete laws. On March 27, 2018, Utah imposed special restrictions on the use of non-compete agreements in the broadcasting industry.  One day later, Idaho modified the standard of proof that must be followed when a company seeks an injunction against a former employee or independent contractor who is violating a non-compete covenant.

Utah Restricts Use Of Non-Competes In Broadcasting Industry

On March 27, 2018, Utah Governor Gary Herbert signed a bill modifying the State’s Post-Employment Restrictions Act to significantly curtail the enforcement of non-compete agreements against employees in the broadcasting industry. The original bill, enacted just two years ago in the 2016 Legislative Session, was covered by us in an article dated April 7, 2016.

Utah’s original non-compete bill served two purposes. First, the bill imposed a one-year time limit on post-employment non-compete covenants, other than those included in “reasonable severance agreement[s]” and those “related to and arising out of the sale of a business[.]”  Second, the bill authorized employees to seek attorneys’ fees and actual damages against employers that attempted to enforce unenforceable non-competes.

With the new amendment, Utah has imposed special restrictions on the enforcement of non-compete covenants against employees of “broadcasting compan[ies].” Specifically, the amended bill bars the enforcement of non-competes against broadcasting employees unless they are paid a salary of at least $913 per week (i.e., $47,476 per year). Further, for broadcasting employees who meet the salary test, non-compete covenants will be valid only if:

  • The covenant “is part of a written employment contract with a term of no more than four years”; and
  • The employee is either terminated “for cause,” or the employee breaches the employment contract “in a manner that results in” his or her separation.

Finally, although the original one-year time limit on non-competes generally applies in the broadcasting industry, the amended bill prohibits non-competes from extending beyond the original term of the employee’s written contract. Consequently, if a broadcasting employee’s separation occurs less than one year before his or her contract expires, the restricted period must also end by the contract expiration date.

While curtailing the use of non-compete agreements for broadcasting employees, the Utah amendments stop well short of the broader prohibitions against non-compete agreements for broadcasting employees that exist in Arizona, Connecticut, the District of Columbia, Illinois, Maine, Massachusetts, and New York.

As discussed in our 2016 article, Utah’s non-compete law does not apply to non-solicitation and non-disclosure/confidentiality agreements. In discussing the broadcasting restrictions, Governor Herbert stated he would oppose any further limitations on the use of non-competes under Utah law.

Idaho Modifies Standard of Proof For Non-Compete Enforcement Actions

On March 28, 2018, Idaho repealed a two-year-old amendment to its non-compete law that had made it easier for employers to obtain injunctive relief against “key employees” and “key independent contractors” who violate their non-compete covenants. However, in approving the repeal, Governor C.L. “Butch” Otter questioned the wisdom of the move.

Under Idaho Code §44-2701 et seq., enacted in 2008, companies may enter into non-compete agreements with “key employees” and “key independent contractors” to protect a legitimate business interest, provided the restrictions are reasonable as to duration, geographic area and type of employment.  To be classified as a “key” employee or independent contractor, the statute requires proof that the individual has the ability, based on the nature of his or her position, “to harm or threaten an employer’s legitimate business interests.”  The statute further provides a non-inclusive list of “legitimate business interests,” which includes company goodwill, customer relationships, referral relationships, vendor relationships, confidential information, and trade secrets.

Effective March 30, 2016, the legislature amended the non-compete law to provide that if a company sought injunctive relief against a “key” employee or independent contractor, and the court found a violation of the non-compete covenant, the company would be entitled to a rebuttable presumption of irreparable harm. To rebut that presumption, the key employee or independent contractor had to prove that he or she had “no ability to adversely affect the employer’s legitimate business interests.”

On March 28, 2018, Governor Otter allowed the repeal of this rebuttable presumption of irreparable harm to take effect without his signature. With this action, Idaho has effectively placed the burden back on companies to establish a likelihood of irreparable harm before an injunction can be issued.

In a letter confirming his decision, the Governor expressed reservations about the repeal, writing that there was “no consensus within the business community” for the change.  Further, he expressed his support for a rebuttable presumption of irreparable harm, and suggested that the Legislature seek “a better solution” in the next Legislative Session.  Nevertheless, he opined that, “since it is my understanding that the 2016 language has never been tested in court, there seems to be little risk in removing it” for the time being.

Conclusion

These legislative developments reflect that non-compete reform remains a high priority for state legislatures throughout the country (see our recent articles regarding legislative initiatives in Massachusetts, New Jersey, New Hampshire, Pennsylvania and Vermont).  Companies with questions about the enforceability of restrictive covenants in their jurisdictions are encouraged to contact a Jackson Lewis attorney for further guidance.

Massachusetts Seeks Finality On Non-Compete Legislation

On December 27, 2017, we wrote about the Massachusetts Legislature’s efforts to regulate the use of non-compete agreements, including three bills that sought to require post-separation “garden leave” payments to former employees while they were restricted from engaging in competitive activities. Less than one month later, news reports suggested that negotiators in the Joint Committee on Labor and Workforce Development were nearing a compromise deal.

In an article posted on our website on March 2, 2018, Erik Winton (Boston), Clifford Atlas (NYC) and Colin Thakkar (Jacksonville) examine the areas of likely agreement and disagreement as the Legislature attempts to hammer out a final deal. The article also highlights certain areas in which additional clarification from the Legislature would be helpful to both employers and employees who are ultimately affected by the anticipated legislation.

We will continue to provide updates as the legislative process continues.

Wisconsin Supreme Court Applies Non-Compete Law To Invalidate Anti-Poaching Covenant

On January 19, 2018, a divided Wisconsin Supreme Court held that an employee non-solicitation covenant was overly broad and unenforceable under state law. In the decision, entitled The Manitowoc Company, Inc. v. Lanning, Case No. 2015AP1530 (Wisc. Jan. 19, 2018), the Court confirmed Wisconsin Statute §103.465, which governs covenants not to compete, extends to agreements not to solicit employees.  Because the employee non-solicitation covenant did not meet the statutory criteria for valid non-competes, the Court held it unenforceable in its entirety, “even as to any part of the covenant that would be a reasonable restraint.”

Factual Background

Manitowoc is a manufacturing company that produces food service equipment and construction cranes. In 1985 Manitowoc hired John Lanning as a chief engineer in its construction crane division.  Lanning held the position for approximately 25 years, until January 6, 2010, when he resigned his employment to become the director of engineering for one of Manitowoc’s direct competitors.  At the time of Lanning’s resignation, Manitowoc boasted a global workforce of approximately 13,000 employees.

After joining Manitowoc’s competitor, Lanning admittedly participated in efforts by his new employer to recruit at least nine Manitowoc employees. In response, Manitowoc sued Lanning for violating an agreement he signed in 2008 that included a covenant not to solicit Manitowoc employees. Under that agreement, Lanning committed, for a period of two years following his separation of employment, to “not (either directly or indirectly) solicit, induce or encourage any employee(s) to terminate their employment with Manitowoc or to accept employment with any competitor, supplier or customer of Manitowoc.”

Based on Lanning’s acknowledgment that he helped recruit Manitowoc employees within two years of his resignation, the trial court ruled in Manitowoc’s favor and awarded the company a significant amount in damages, including over $1 million in attorneys’ fees. However, Manitowoc’s victory was short-lived, as the Court of Appeals of Wisconsin overturned the trial court’s judgment on August 17, 2016.  In that decision, which we covered on our Blog, the court of appeals held that the employee non-solicitation covenant was overly broad and unenforceable under Wis. Stat. §103.465.

In its appeal to the Wisconsin Supreme Court, Manitowoc argued that Wis. Stat. §103.465 did not govern the covenant at issue and instead related only to traditional non-compete agreements. Manitowoc further argued that even if Wis. Stat. §103.465 applied to the employee non-solicitation covenant, the covenant was reasonably designed to protect the company’s legitimate interests.

Lanning’s Employee-Nonsolicitation Agreement Constituted A Restraint on Competition

Entitled “Restrictive covenants in employment contracts,” Wis. Stat. §103.465 provides that “[a] covenant … not to compete … is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal.” The statute further states that “[a]ny covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.”

Seizing on the statute’s express reference to covenants not to compete, and the absence of any reference to non-solicitation provisions, Manitowoc argued that the statute only covers traditional non-compete covenants. Lanning’s employee non-solicitation covenant did not use the words, “covenant not to compete,” and did not prevent him from accepting comparable employment with Manitowoc’s competitors.

Rejecting Manitowoc’s position as unduly narrow, the Court held that, viewed in its entirety, Wis. Stat. §103.465 is intended to cover any provision that constitutes a restraint of trade by restricting competition. The Court went on to identify types of agreements that could meet that threshold for coverage under the statute, including traditional non-compete agreements, non-solicitation agreements, non-disclosure/confidentiality agreements, and even “no-hire provision[s] between two employers.”

In reviewing Lanning’s employee non-solicitation covenant, the Court stated that the covenant: (i) restricts Lanning from competing with Manitowoc through recruitment; (ii) restricts Lanning’s new employer from “competing fully … in the labor pool”; and (iii) restricts Manitowoc’s other employees from competing fully with the Company by “insulating [them] from Lanning’s solicitations.” As such, the Court concluded, the covenant was governed by Wis. Stat. §103.465. 

Employee Non-Solicitation Agreement Too Broad to Warrant Enforcement Under State Law

Applying the statute to Lanning’s employee non-solicitation covenant, the Court ruled that the covenant failed to meet the requirement that it be “no broader than is necessary to protect the employer’s business.” First, the covenant prohibited Lanning from encouraging Manitowoc’s employees to resign their employment for any purpose, even a non-competitive one such as retirement.  Second, it restricted Lanning’s access to “any” of Manitowoc’s 13,000 employees, even those with whom he had never worked and about whom he had no unique knowledge or relationship.

Essentially, the purpose of the employee non-solicitation covenant was not simply to prevent Lanning from competitively exploiting personnel information and/or relationships he gained through his employment with Manitowoc, but to help Manitowoc maintain its entire workforce. Such purpose, according to the Court, “flouts the generally recognized principle that the law ‘does not protect against the raiding of a competitor’s employees.’”

Finally, Manitowoc argued that even if the employee non-solicitation covenant was unduly broad, the covenant was lawful to the extent that it prohibited the actual conduct in which Lanning was found to have engaged.  The Court rejected that argument as well, noting that Wis. Stat. §103.465 does not permit judicial modification of overly broad restrictive covenants.  “Our legislature … has declared that if an agreement imposes an unreasonable restraint, it is illegal, void, and unenforceable even as to so much of the covenant as would be a reasonable restraint.”

Lessons Learned

It bears noting the sharp disagreement among the Court’s majority regarding the appropriate scope of Wis. Stat. §103.465. Specifically, while three Justices concurred with the result of the lead opinion, they criticized the opinion for suggesting that the statute governed anti-competitive agreements between companies.  They also disagreed with the lead opinion’s consideration of the employee non-solicitation covenant’s anti-competitive impact on non-parties to the agreement, including Lanning’s new employer and Manitowoc’s other employees.  Based on a plain reading of the text, the concurring Justices argued that Wis. Stat. §103.465 governed only covenants between an employer and employee, that restricted the competitive activities of the party employee.

Notwithstanding such disagreements, Wisconsin employers should ensure that any restrictive covenant agreements between an employer and an employee are narrowly tailored to meet the conditions of Wis. Stat. §103.465. Further, as explained in our recent article regarding federal antitrust laws, employers should be extremely cautious about entering into anti-competitive agreements with other companies, regardless of the applicability of Wis. Stat. §103.465.  Companies seeking to ensure their compliance with restrictive covenant and related laws are encouraged to contact a member of Jackson Lewis’s Non-Competes Practice Group for guidance.

Lead Antitrust Attorney Hints At Upcoming Prosecutions For No-Poach Agreements

The chief prosecutor in the U.S. Department of Justice’s Antitrust Division signaled last week that his unit expects to initiate criminal actions against multiple companies accused of entering unlawful pacts not to hire each other’s employees.  Such action would fulfill earlier promises, by both the Trump and Obama Administrations, to treat employment-related antitrust violations with the same seriousness afforded to more traditional, consumer-based antitrust issues.

The public often thinks of price-fixing and other consumer-focused schemes as “traditional” antitrust violations.  However, it can be similarly unlawful for companies to form agreements that suppress the opportunities of employees. On October 20, 2016, the Department of Justice and Federal Trade Commission published Antitrust Guidance for Human Resource Professionals, cautioning employers that agreements with other companies to limit the wage rates of similar types of workers, or not hire each other’s workers, are unlawful and would be subject to criminal prosecution. Among other things, the Guidance cautions employers on sharing wage information under some circumstances.

Less than one month after the above-referenced guidance was issued, Donald Trump was elected President. Despite the change of Administration, the Antitrust Division has indicated that it fully intends to continue the charge against wage-fixing and no-poaching agreements.

On January 19, 2018, the lead attorney of the Antitrust Division, Makan Delrahim, discussed the Division’s position toward no-poaching agreements during a conference hosted by the Antitrust Research Foundation at George Mason University’s Antonin Scalia Law School. During the presentation, which Law 360 reported later that day, Mr. Delrahim told attendees that the Division would be initiating multiple criminal prosecutions “[i]n the coming couple of months[.]”  Not surprisingly, he did not share the names of any companies that the Division intended to charge in those actions.

The Antitrust Division’s interest in criminal prosecutions represents a continuation from the Obama Administration.  Nevertheless, Mr. Delrahim identified one way in which the Division intended to diverge from the prior Administration. Specifically, the Division intends to move away from consent agreements that implement behavioral remedies, and look more closely at structural remedies such as divestitures.  As Mr. Delrahim explained, behavioral remedies create a need for continuing administrative oversight.  Further, even with the additional oversight they still can be extremely difficult to enforce.  On the other hand, by requiring changes to a company’s corporate structure, the Division can reduce a company’s ability to violate antitrust law, with or without costly monitoring.

On November 9, 2016, we published an article discussing the above-referenced Guidance for Human Resource Professionals.  We will provide further updates as any of the anticipated criminal actions are announced.  Companies seeking to ensure their compliance with employment-based antitrust laws are encouraged to contact a member of Jackson Lewis’s Non-Competes Practice Group for guidance.

A Protocol On Life Support – Financial Industry Assesses The Aftermath Of Major Defections From Broker Recruitment Pact

In the fourth quarter of 2017, two major financial firms dropped out of an industry-wide Protocol for Broker Recruiting (the “Protocol”), an agreement designed to reduce litigation surrounding the movement of stockbrokers between competing firms. While those departures do not necessarily seal the fate of the Protocol, they do portend an increase in litigation to enforce customer non-solicitation covenants against departing brokers.

Origins Of The Protocol

In 2004, UBS, Merrill Lynch (“Merrill”) and Smith Barney, three of the largest investment firms in the financial industry, created the Protocol, which enables brokers to maintain their client base while moving from one firm to another, provided certain procedures are followed, without risking restrictive covenant litigation. At the time, the dominant business strategy of financial firms was to recruit outside brokers with large books of business, rather than to invest in the development of their existing brokers. Further, while firms could prevent recently departed brokers from actively soliciting former clients, they could not prohibit those brokers from accepting the business of former clients who followed the brokers on their own initiative. Consequently, it was in the firms’ mutual interest to facilitate the movement of brokers and their clients in a manner that did not threaten the firms’ trade secrets or compromise client privacy rights.

Pursuant to the Protocol, a broker whose new and old firms are both signatories is generally permitted to take certain limited client information to the new firm, including the name, address, phone number, email address, and account title for every client that he or she personally serviced at the former firm. Before taking such information, the broker must provide a written resignation letter to the firm from which the broker is departing, together with a list of the clients the broker intends to retain. By abiding with those conditions, and not otherwise violating other legal obligations, such as statutes prohibiting the theft of trade secrets, brokers are insulated from being sued for violation of non-solicitation and/or non-disclosure agreements related to those clients.

Rome Is Burning

In the initial years following its formation, the Protocol worked as planned for the major financial firms. Although they theoretically suffered from losing brokers and clients without the possibility of judicial recourse, they successfully countered those losses by recruiting new brokers in equal or greater numbers.

Eventually, the net gain for the big firms devolved into a net loss as the Protocol was increasingly adopted by small and mid-sized firms whose recruiting goals greatly exceeded their rates of attrition. Those losses were compounded further as newer signatories adopted strategies to reap the benefits of the Protocol arrangement while avoiding its drawbacks. For instance, smaller firms would employ targeted strikes, whereby they would join the Protocol, hire a recruit from a competing Protocol firm, and then quickly exit the Protocol before any of their existing brokers could be lured away. In other cases, non-signatory investment firms would hire brokers through signatory brokerage firms (with the investment and brokerage firms considered as joint employers to the brokers), in order to similarly benefit from the Protocol’s recruiting rights without risking equivalent losses to competing Protocol firms.

On October 30, 2017, Morgan Stanley announced that it would be leaving the Protocol and returning to the original system favoring strict enforcement of one-year customer non-solicitation covenants. Approximately one month later, UBS followed suit, withdrawing from the Protocol, effective December 1, 2017. In explaining their withdrawals, the firms decried the allegedly underhanded tactics of smaller firms, and cited their intention to focus more on retaining and developing their existing workforces, and less on poaching competitors’ workers.

In the wake of UBS’ departure, industry observers speculated that Merrill would be the next shoe to drop, given that Merrill was experiencing a net negative recruitment ratio comparable to Morgan Stanley and UBS. However, on December 4, 2017, Merrill confounded those expectations by announcing its intent to remain a part of the Protocol.

What Now?

With Morgan Stanley and UBS exiting the Protocol, the remaining signatories are left with a smaller pool of brokers whom they can recruit without fear of litigation. On the other hand, if other signatories follow Merrill’s lead and remain in the Protocol, it is possible that the more than decade old arrangement will survive.

Regardless of whether the Protocol survives or falls, certain consequences of the above-referenced departures are clear. First, it will be much more difficult for Morgan Stanley and UBS brokers to join competing firms, given that their books of business are suddenly less portable than those of brokers employed by signatory firms. Second, there will likely be a significant increase in restrictive covenant litigation, both when Morgan Stanley and UBS lose brokers to, and recruit brokers away from signatory firms.

If the current recruitment situation in the financial industry is uncertain, the level of confusion will likely only increase as the various impacted parties adjust to the changing landscape. Employers seeking to make sense of these new developments are encouraged to contact a Jackson Lewis attorney for further assistance.

Consider This – Minnesota Court Of Appeals Again Requires Proof Of Additional Consideration For Non-Compete Agreements For Existing Employees

In October and November of this past year, we wrote about two Minnesota court decisions – Mid-America Business Systems v. Sanderson et al., Case No. 17-3876 (Dist. Minn. Oct. 6, 2017) and Safety Center, Inc. v. Stier, Case No. A17-0360 (Minn. App., Nov. 6, 2017) — that addressed the adequacy of consideration that is provided in exchange for entry into a non-compete agreement.  The facts in those cases differed based on whether the individual subject to the non-compete agreement was a prospective or existing employee.  The combined conclusion was that employment alone is adequate consideration only as to prospective employees, who must be presented with the agreement prior to acceptance of the offer of employment.  Otherwise, proof of additional valuable consideration is necessary.  More recently, in AutoUpLink v. Janson, Case No. A17-0485 (Minn. App., Dec. 4, 2017), the court hammered home that in the latter instance, the employer must clearly establish that the alleged additional consideration was conditioned specifically on execution of the non-compete agreement.

Facts

AutoUpLink (“AUL”) hired Lynn Janson (“Janson”) to develop a sales territory in Michigan. Several days into Janson’s initial job training, AUL’s co-founder held a meeting with Janson, during which the co-founder advised him of the following: (a) he must sign a non-compete agreement as a condition of employment, (b) he would be eligible to participate in the company’s 401K plan, (c) he would receive a computer allowance, and (d) he would be entitled to reimbursement for telephone usage.  That was the first time AUL mentioned any of those subjects to Janson.

After signing the non-compete agreement, Janson went on to enjoy a successful employment tenure until he was involuntarily terminated approximately ten years later due to an alleged dispute over pay. Following his separation of employment, Janson joined a competing business founded by his wife, allegedly convinced several other AUL employees to join him, and allegedly solicited numerous AUL customers to follow him as well.  AUL filed suit against Janson and moved for injunctive relief to bar further competition during the pendency of the legal proceedings.  After granting an initial temporary restraining order against Janson, the court denied AUL’s motion for preliminary injunction on the grounds that the non-compete was not supported by independent consideration.  The Minnesota Court of Appeals Agreed.

The Court’s Analysis

On appeal, AUL challenged the lower court’s finding that the non-compete agreement lacked adequate consideration. AUL argued that Janson was informed of several new benefits when he signed the non-compete agreement, including 401K plan eligibility, the computer allowance, and reimbursement of telephone costs.  AUL further noted that after signing the non-compete, Janson received pay raises and gained additional responsibilities.  According to AUL, those benefits, viewed individually or as a combination, constituted adequate and valuable consideration sufficient to support enforcement of the non-compete agreement.

In rejecting AUL’s argument, the court of appeals explained that “there is no independent consideration unless the benefits received go beyond what was already obtained in the initial employment agreement.”  While the benefits cited by AUL could have served as adequate consideration for the non-compete agreement had they been granted to Janson in exchange for such agreement, AUL failed to establish that connection.  Similarly, with respect to the alleged increase in pay and responsibilities, the evidence indicated that those changes were simply a reflection of Janson’s job performance and level of experience.  In other words, in the court’s assessment, those changes had nothing to do with Janson’s agreement to the non-compete covenant.

Summary

The AutoUpLink decision offers an important reminder to Minnesota employers who seek to impose a non-compete agreement on an individual who has already accepted an offer of employment.  Although it is necessary to show that additional benefits and/or pay were awarded to the employee upon execution of the agreement, the employer must go further in proving a connection between the execution of the agreement and the award of additional benefits and/or pay.  Employers can help to establish the necessary link by expressly identifying any alleged consideration in the non-compete agreement itself.  Please contact a member of Jackson Lewis’s Non-Competes Practice Group for further assistance in establishing enforceable non-compete agreements.

The Trend Continues: New Non-Compete Bills Introduced In Pennsylvania, New Hampshire and Vermont

In the final month of 2017 we discussed efforts by the Massachusetts and New Jersey legislatures to limit the use of employment non-compete agreements. By the start of 2018, the spike in activity had become a trend, with Pennsylvania, New Hampshire and Vermont introducing non-compete legislation of their own.

In an article posted on our website, Daniel Schwartz (Portsmouth), Martha Van Oot (Portsmouth), Erik Winton (Boston), and Colin Thakkar (Jacksonville) analyze the New Hampshire bill, which bars non-compete agreements for low-wage employees, as well as the Pennsylvania and Vermont bills, which bar non-competes altogether in ordinary employment relationships. Given the rarity of enforcement actions against low-wage employees, New Hampshire should not encounter significant pushback in its legislative efforts.  On the other hand, we suspect that the Pennsylvania and Vermont legislatures will have a much more difficult time in their efforts to join California, North Dakota and Oklahoma as the only states in the country to have implemented broad non-compete bans.

We will continue to provide updates as the non-compete bills move through the legislative process.

In The Weeds: A Close Inspection Of The Massachusetts Legislature’s Garden Leave Push

The Massachusetts Legislature has spent the past several years seeking to regulate the use of restrictive covenant agreements in the Commonwealth. Despite repeatedly falling short in that initiative, the 2017 legislative session strongly signaled the Legislature’s enduring interest in this subject by introducing a whopping eight new competing bills.

In an article posted on our website, Erik Winton (Boston), Cliff Atlas (New York City) and Colin Thakkar (Jacksonville) analyze the “garden leave” requirements set forth in three of the bills, pursuant to which employers who choose to enforce post-employment non-compete covenants would be required to continue paying the affected former employees during the restricted time period. Although the Legislature has and continues to receive valuable input from non-compete experts as it works to resolve any issues in the bills, one resource it will not be able to draw from is the experiences of other legislative bodies.  That is because Massachusetts would be the first state in the nation to legislatively implement a garden leave requirement, if the garden leave concept ultimately is adopted.

On October 31, 2017, members of our Boston office attended a public hearing organized by the Massachusetts Joint Committee on Labor and Workforce Development to discuss the pending non-compete bills. During the hearing, substantial attention was devoted to the proposed garden leave provisions, including the absence of any other states to have passed such a requirement.  While the Committee members dismissed the notion that they would be reluctant to forge a new path in that regard, it is too early to predict whether the path they pursue will lead to the finish line.

We will continue to provide updates as the non-compete bills move through the legislative process.

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