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.

Federal Court Interprets Florida and Pennsylvania Law To Endorse Protection Of Salon Services Company’s Customer Relationships And Specialized Information

In states that permit the enforcement of non-compete and other restrictive covenant agreements against former employees, companies must still demonstrate that the restrictions are designed to protect a legitimate business interest, and not to simply avoid ordinary competition. In Osborne Assocs. v. Cangemi, Case No. 3:17-cv-1135-J-34MCR (M.D.Fla. Nov. 14, 2017), the federal court for the Middle District of Florida held that under both Florida and Pennsylvania law, a salon and spa treatment company that serviced residents of senior living facilities had protectable interests in its customer relationships as well as the confidential business information it developed in furtherance of those relationships. A key factor in the decision was that the company’s customers were not the residents of the facilities, but the facilities themselves.

Background

For approximately twenty-five years, Osborne Associates, Inc. d/b/a Generations Salon Services (“Generations”) has provided professional salon and spa services to residents of senior living facilities. However, while the residents were the ultimate service recipients, Generations did not transact business with them directly, but instead with the senior living facilities where they resided.  In this niche market, business relationships between salons and senior living facilities are typically continuing in nature and subject to exclusivity contracts that impede the facilities’ use of competing businesses.

In March 2016, Generations hired Sheryl Cangemi as its Director of Business Development (based in Florida), and Julie Calianno as the Regional Operations Manager for its Pennsylvania territory. Cangemi and Calianno both signed restrictive covenant agreements that prohibited them from “working in a competitive activity for a period of one year following the termination of employment; soliciting any client, customer, officer, staff, or employee of Generations Salon for [a competing purpose]; and using or disclosing Generations Salon’s confidential and proprietary information.”  Given that Calianno was employed in Pennsylvania rather than Florida, her agreement called for enforcement under Pennsylvania law.

Less than one year after their hire dates, Cangemi and Calianno resigned from Generations and joined forces to operate a competing business. Generations filed suit and sought a preliminary injunction against Cangemi and Calianno, claiming they violated their agreements by competing with the company, soliciting the senior living facilities that it counted as customers, and using Generations’ confidential customer information to convert business to their new company.

In opposition, Cangemi and Calianno argued that their restrictive covenant agreements were not supported by any protectable interests. The court disagreed, holding that under both Florida and Pennsylvania law, Generations had protectable interests in its customer relationships, as well as customer lists and other specialized confidential information it developed in furtherance of the relationships.

Protection of Customer Relationships

Importantly, had Generations transacted business directly with the residents, rather than their senior living facilities, it would have been much more difficult to establish protectable customer relationships.  As the court explained, customer relationships cannot be fleeting, and are more likely to be protected where: (a) active, ongoing business is being conducted; (b) the business is contracted to be the exclusive service provider for the customer; (c) the customer cannot be easily identified by competing businesses; and/or (d) there is an expectation of continued business.  Those elements are not typically found where services are provided to members of the general public.

In Generations’ case, however, it entered into exclusive contracts with senior living facilities to provide services for all residents of those facilities.  Further, Generations’ business relationships with the senior living facilities were active and ongoing.  As such, the court held that Generations successfully established a protectable interest in its customer relationships, which, under Florida and Pennsylvania law, supported the enforcement of non-compete and non-solicitation covenants.

Protection of Confidential Customer Information

The court also held that the restrictive covenant agreements were necessary to protect Generations’ confidential business information. Under both Florida and Pennsylvania law, business information is not protectable if it is commonly known and accessible to other businesses in the industry.  On the other hand, “business information which is not otherwise readily available to the public, or has been acquired or compiled through the industry of a party, can be deemed a protected legitimate business interest.”

Here, Generations provided Cangemi and Calianno with access to not just the names of its senior living facility customers but also high-level customer contact information, customer-specific pricing and sales information, and marketing strategies – information the court found to have been uniquely developed and not readily available to the public. Generations also took reasonable steps to protect the confidentiality of such information through non-disclosure agreements and restrictions on employee access.  As such, the court concluded that Generations had a protectable interest in its customer lists and related confidential business information.

Lessons Learned

As the court’s decision demonstrates, Florida and Pennsylvania are largely consistent in holding that customer relationships, and confidential business information developed in furtherance of those relationships, are protectable interests that can support the use of restrictive covenant agreements. Moreover, this is true even in industries that traditionally serve the general public, provided a company’s business model is designed to promote substantial and lasting customer relationships.  Employers that are considering whether their business models allow the use of restrictive covenant agreements are invited to contact a member of Jackson Lewis’s Non-Competes Practice Group for further assistance.

New Jersey Bill Would Limit Non-Compete Agreements

A bill in the New Jersey Senate, Senate Bill 3518 (“SB 3518”), and an identical companion bill in the New Jersey Assembly (Assembly Bill 5261), would significantly curtail the use of non-compete agreements in New Jersey.  In an article posted on our website, Cliff Atlas, Kevin Miller and Colin Thakkar analyze SB 3518 and pose key questions about the impact and wisdom of the proposed legislation.  While certain recent reports have suggested that employers overuse or abuse non-compete agreements against even low-level employees, that conclusion is inconsistent with our overall experience.  It is unclear how the legislature would be better equipped than the courts to combat improper use or abuse of non-compete agreements in particular cases.  These and other questions will undoubtedly be addressed, and hopefully answered, during the upcoming legislative proceedings.

 

Members of Jackson Lewis’s Non-Competes Practice Group are prepared to help employers with New Jersey employees navigate this budding legislative initiative.

Minnesota Court Of Appeals Reaffirms That A Non-Compete Must Be Part Of A Job Offer To A Prospective Employee

Last month, this Blog highlighted a Minnesota decision evaluating the consideration required for non-compete agreements entered into after the commencement of employment.  As that decision held, such agreements must be supported by valuable consideration over and above continued employment.

This month, in Safety Center, Inc. v. Stier, Case No. A17-0360 (Minn. App., Nov. 6, 2017), the Minnesota Court of Appeals weighed in on the consideration required for non-compete agreements entered into at the commencement of employment.  In doing so, the court issued an important reminder to employers that impose non-competes as a condition of employment:  if the conferral of at-will employment is to serve as the only consideration for a non-compete agreement, then the agreement must be presented to the employee before the offer of employment is accepted.  This timing for the presentation of the non-compete agreement to the new hire is different from the looser requirements applicable in most states.

Background

On May 19, 2013, Joan Stier interviewed for a part-time therapist position at Safety Center, a treatment center for special-needs sex offenders. Shortly thereafter, Safety Center made an offer of employment to Stier, which she accepted.

Safety Center sent Stier a letter confirming her acceptance of the job. The letter discussed Stier’s rate of pay and other terms of employment, but made no mention of the need for a restrictive covenant agreement.  Nevertheless, on Stier’s first day of work, she was handed a non-compete agreement and told to sign it in order to be able to commence employment.  Stier signed the agreement and proceeded to work for Safety Center for nearly twelve years, eventually attaining the position of Program Director.

In 2015, Stier resigned from Safety Center and started a competing treatment center, in express violation of the non-compete agreement she signed on her first day of employment. Safety Center sued and sought enforcement of the agreement.

The Court’s Analysis

The Minnesota Court of Appeals relied upon well-settled law in holding that Stier’s non-compete agreement was unenforceable. When a non-compete agreement is not specifically made part of the offer of employment, i.e., ancillary to the employer’s offer and employee’s acceptance, there must be independent consideration for the non-compete.  This holds true whether the non-compete is presented to the employee on the first day of employment, or the tenth year of employment.

Critical to the court’s decision was its determination that an offer was made by Safety Center, and accepted by Stier, before Safety Center ever advised her of the requirement of a non-compete agreement. In other words, the non-compete was not “ancillary” to the employment offer and acceptance.  Consequently, Safety Center could not create an enforceable non-compete agreement without providing Stier with independent consideration for signing it, over and above continued employment.  Safety Center failed to do that, and, therefore, the court refused to enforce the agreement.

The Takeaway

This case serves as an excellent reminder that Minnesota employers should describe the requirement of a non-compete agreement in the job offer to a prospective employee, and perhaps include a copy of the non-compete with the job offer. Please contact a member of Jackson Lewis’s Non-Competes Practice Group for further assistance in establishing enforceable non-compete agreements.

SCOTUS Declines To Review Password Sharing Prosecution Under Computer Fraud and Abuse Act

Our Workplace Privacy, E-Communication and Data Security Practice Group recently posted this article regarding the United States Supreme Court’s denial of certiorari in Nosal v. Unites States, 16-1344.  This Blog previously posted articles about the Nosal case, which can be found here and here.

In the Nosal case, the individual defendant was criminally prosecuted under the Computer Fraud and Abuse Act (“CFAA”), for using his past assistant’s password to access his former employer’s computer system after the company had revoked his own access credentials. His conviction was affirmed by the Ninth U.S. Circuit Court of Appeals, and the petition for certiorari to the U.S. Supreme Court followed.

By declining to review the Ninth Circuit’s affirmance, the Supreme Court left in place a pronounced split in the Circuit Courts regarding the extent to which the CFAA applies in the employment context. While the First, Fifth and Eleventh Circuits generally hold a similar view as the Ninth Circuit, other courts have concluded that criminal prosecution under the CFAA was intended for the more limited purpose of targeting third party hackers.  Jackson Lewis attorneys, including members of our Non-Competes and Protection Against Unfair Competition Practice Group, are available to answer further questions.

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