Delaware Court Grapples With Enforcement of Choice of Law Provisions in Restrictive Covenant Agreements

When implementing restrictive covenant agreements in their workforces, companies often grapple with how best to handle the wide variation in the law from one state to the other. One solution is to include a choice of law provision that calls for all agreements to be construed under the laws of a single state. Still, there is no guarantee that courts will honor a choice of law provision, particularly where the purpose of the agreement conflicts with the public policy interests of a different state that shares an interest in the subject matter at issue.

Twice in recent months, the Delaware Chancery Court addressed the enforceability of Delaware choice of law provisions in restrictive covenant agreements involving out-of-state employees. In Cabela’s LLC v. Wellman et al., Case No. 2018-0607-TMR (Oct. 26, 2018), the plaintiff, a Delaware corporation with headquarters in Nebraska, sued four former director-level employees from its Nebraska headquarters. Meanwhile, the plaintiff in NuVasive, Inc. v. Miles, Case No. 2017-0720-SG (Sept. 28, 2018) was also a Delaware corporation but with business operations in California, and was suing to enforce a non-compete agreement against a similarly high-level employee in California. In both Cabela’s and NuVasive, the defendant employees resided, worked, and ultimately sought to compete with their former employers in Nebraska and California, respectively. In other words, virtually all relevant activities at issue in the cases occurred outside of Delaware. Nevertheless, the plaintiff former employers asked the Court to enforce their agreements under Delaware law, based on their inclusion of Delaware choice of law provisions in the relevant agreements.

While Delaware courts generally honor contractual choice of law provisions, the Court noted an important public policy exception to that rule. As the court explained in Cabela’s, “[w]here the parties enter a contract which, except for the choice of law provision, would be governed by the law of a [different] state, and that state has a public policy under which a contractual provision would be limited or void, the Restatement recognizes that allowing the parties to contract around that public policy would be an unwholesome exercise of freedom of contract.” (Internal citations omitted). To determine whether that exception should apply to the Cabela’s and NuVasive agreements, the Court examined the following questions:

      • Would another state’s laws apply in the absence of a choice of law provision?
      • If so, would enforcing the non-compete covenant violate a fundamental public policy of that other state?
      • If so, are the other state’s applicable public policy interests materially greater than the applicable public policy interests of Delaware?

In Cabela’s, the Court found that Nebraska law would apply in the absence of the Delaware choice of law provision, given Nebraska’s stronger contacts with the agreements. Second, the Court concluded that the defendants’ agreements, which were broadly drafted to prohibit ordinary competition, violated Nebraska’s fundamental public policy, which strictly prohibits such agreements unless they are narrowly tailored to prevent misappropriation of customer goodwill, confidential information, or trade secrets. Third, the Court held that Nebraska’s specific public policy against restraints on trade was materially greater than Delaware’s general public policy interest in freedom of contract. As the Court explained, where the contract at issue “is abhorrent and void” under Nebraska public policy, “and where, as here, the formation and enforcement of the contract relate overwhelmingly to [Nebraska], a general interest in freedom of contract is unlikely to be the equal of that public policy[.]” On those grounds, the Court refused to honor the Delaware choice of law provision.

Applying the same criteria, the Delaware Chancery Court reached the opposite conclusion in the NuVasive decision. Just as the facts in Cabelo’s related overwhelmingly to Nebraska, the facts in NuVasive related just as strongly to California. Further, it is generally understood that California law prohibits restrictive covenant agreements broadly. Section 16600 of the California Business and Professional Code strictly prohibits all restraints on competition in the employment context. Further, Section 925 of the California Labor Code prohibits employers from implementing choice of law or choice of forum provisions that circumvent California’s statutory protections or restrict access to a California judicial forum. The Court noted that these provisions reflect strong public policies against the enforcement of non-compete agreements against California residents.

Nevertheless, the NuVasive Court ultimately approved the choice of Delaware law provision due to one important distinguishing factor – the former employee was represented by an attorney in the negotiation of the non-compete agreement. The Court noted that although California Labor Code Section 925 generally prohibits parties from contracting around California substantive laws and California judicial forums, it carves out an exception with respect to employees who are represented by their own legal counsel during the contract negotiations. That carve-out exception, the Court concluded, demonstrated the California Legislature’s recognition “that in the limited subset of cases where the inequality of bargaining strength of the parties to an employment contract is buffered by the employee being represented by independent counsel, and where counsel participated in negotiation of the terms of a choice of law provision, California’s interest in freedom of contract outweighs interest in freedom of employment.” On that basis, the Court held that enforcement of the Delaware choice of law provision would not violate a public policy interest held by California.

The above decisions make clear that Delaware’s public policies may be outweighed by the public policies of a state with a materially greater interest in the litigation. If enforcement of the contract in the manner requested would be abhorrent to the public policies of the latter state, then Delaware courts will not enforce a choice of law provision requiring application of Delaware law. In Cabelo’s and NuVasive, the Court found that Delaware had a lesser interest in the subject matter than Nebraska and California, respectively. However, while the Court also concluded that Nebraska’s interest in the Cabelo’s litigation overrode the parties’ contractually-designated choice of law provision, the same could not be said for California’s interest in the NuVasive litigation, given that the NuVasive defendant negotiated the choice of law provision with the assistance of legal counsel.

Ultimately, the validity of a choice of law provision in a restrictive covenant agreement depends on a number of factors, including the facts at issue as well as the public policies of states that may have a material interest in the subject matter. This analysis should be performed with the assistance of counsel. And, in certain instances, it may be wise for the company to recommend that its prospective employees retain counsel when negotiating their agreements.

Companies needing assistance in the drafting of restrictive covenant agreements are encouraged to contact a Jackson Lewis attorney for related guidance.

State Attorneys General Step Up Antitrust Probes of Franchise Industry Hiring Practices

In the midst of a federal effort to ramp up antitrust prosecutions of companies agreeing not to recruit or hire each other’s employees (see previous articles dated November 9, 2016, January 25, 2018, April 25, 2018 and July 17, 2018), special scrutiny – and criticism – has been directed toward the use of no-poach agreements in the franchise industry.  State Attorneys General now lead the fight to limit the practice, and early indications suggest that their efforts are already producing results.

On July 9, 2018, Attorneys General from 10 states[1] and the District of Columbia launched a joint investigation into the hiring practices of certain national fast-food companies.  In a letter sent to the companies, the Attorneys General requested information regarding restrictive covenant language included in the companies’ franchise agreements which would inhibit the ability of employees to move from one franchisee to another.  According to the Attorneys General, such “no poach” agreements negatively restrict employees’ earning potential, and implicate state-based employee protection laws, as well as consumer protection and antitrust laws.  Responses to the letter were due on August 6, 2018.  As of the date of this post, there has been no official update on the status or content of any responses.

Since the joint investigation was announced, another state that did not join the initial letter revealed in two separate press releases that a number of franchises are already taking steps to curb the use of no-poach clauses in franchisee agreements. First, on July 12, 2018, the Attorney General for the State of Washington, Bob Ferguson, announced that following an investigation by its Antitrust Division, seven national fast-food companies agreed to no longer enforce such “no poach” agreements in their current franchise agreements, and to remove such language from future contracts.  More recently, on August 20, 2018, AG Ferguson announced that eight more fast-food chains entered into similar agreements.  According to both announcements, the concessions were made in order to avoid antitrust lawsuits by the State of Washington.  Significantly, the announcements emphasized that the concessions would take effect not just in Washington but on a nation-wide basis.

In the franchise industry, the use of “no poach” agreements typically provide that the franchisee will not recruit or hire employees (often management employees exclusively) from other franchise locations of the same franchisor. The rationale for such language is to protect franchisees from having their management employees recruited away to other franchise locations after the franchisee expended time and money training such employees.

The state-level probes come on the heels of increased criticism of no-poach agreements by the Department of Justice’s Antitrust Division. While no court to date has found such agreements to violate federal antitrust laws, the DOJ has repeatedly warned that it will treat these types of agreements as illegal restraints of trade, in violation of the Sherman Act, if they are not reasonably tailored to support a broader, legitimate business collaboration.

In this vein, the DOJ has acted aggressively to rein in “no poach” agreements by obtaining civil consent agreements and threatening criminal prosecution against companies who enter into such agreements. There also has been a spike in private class action lawsuits, which are particularly enticing to the class action bar given the potential for a large number of class members, as well as the ability to recoup treble damages, attorneys’ fees, and joint and several liability under the antitrust laws.  In fact, less than one month after the Washington Attorney General announced its first wave of settlements, a new class action lawsuit was filed in Washington State against Auntie Anne’s – one of the seven franchises listed in the initial announcement.

Companies are encouraged to contact a Jackson Lewis attorney with questions about compliance with antitrust laws as they relate to non-solicitation of employees agreements.

[1] Those states include California, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, and Rhode Island.

California Non-Compete Law Renders Surgeon Settlement Agreement Unenforceable

Answering a question left from a previous appeal in the same case, a divided panel of the U.S. Court of Appeals for the Ninth Circuit has concluded that a settlement agreement provision between a physician and his former employer, the California Emergency Physicians Medical Group (“CEP”), constituted a “restraint of a substantial character” on the physician’s medical practice and therefore violated California’s non-compete provision, Cal. Bus. & Prof. Code § 16600. As a result, the entire settlement agreement was void and unenforceable. Golden v. California Emergency Physicians Med. Grp., No. 16-17354 (9th Cir. July 24, 2018).

Background

Dr. Golden worked for CEP as an emergency room surgeon. CEP terminated his employment in 2007, ostensibly because he lacked board certification.  He sued for race discrimination and, following mediation with a magistrate judge, the parties agreed in principal to settle the dispute.  However, Dr. Golden balked when CEP circulated a proposed written agreement containing the following restrictive covenants:

The parties agree that . . . Golden shall not be entitled to work or be reinstated at any CEP-contracted facility or at any facility owned or managed by CEP. The parties further agree that if CEP contracts to provide services to, or acquires rights in, a facility that is an emergency room as defined and regulated by California law at which Golden is employed or rendering services, CEP has the right to and will terminate Golden from any work in the emergency room without any liability whatsoever.  Similarly, the parties agree that if CEP contracts to provide services to, or acquires rights in, a facility at which Golden is employed or rendering services as a hospitalist, CEP has the right to and will terminate Golden from any work as a hospitalist without any liability whatsoever.

Dr. Golden refused to sign the agreement, claiming that this provision of the agreement violated Bus. & Prof. Code §16600. In response, his attorney withdrew and “moved to enforce the agreement so he could collect his fee.”  The district court granted the motion and ordered Dr. Golden to sign, reasoning that because these provisions would only prevent Dr. Golden from working for, not competing with, CEP, they were not a restraint on his medical practice and Section 16600 did not apply. Dr. Golden continued to refuse to sign the agreement and appealed.

The Decision

First, the Ninth Circuit reviewed state law precedent addressing the parameters of Section 16600, concluding that a restraint on future employment may be considered “substantial” even if it is reasonable or narrowly-tailored. In light of this “undemanding” standard, the Court first ruled that the clause restricting Dr. Golden from working at any facility owned or managed by CEP was lawful, “as it simply restates the obvious proposition that an employee does not have a general right to work for an employer without the employer’s consent” and, in any event, the restraint on Dr. Golden’s ability to practice his profession was minimal because CEP owned or managed only a few clinics.

However, the Court of Appeals found that the clauses purporting to bar Dr. Golden from working at CEP-contracted facilities, now or in the future, violated Section 16600 due to the extent of CEP’s current emergency room contracts in California (handling between 25% and 30% of all emergency room admissions in the state), as well as at facilities with which it may later contract, given its significant growth in the state during the previous decade.  The dissent contended that the majority was engaging in rank speculation in this latter respect, especially given that Dr. Golden had worked continuously during the decade-plus since his departure from CEP; had never been denied employment since the litigation began; and could not point to “any evidence that he would be fired, actually restrained, or barred from engaging in his profession upon signing the settlement agreement.”  Nevertheless, the majority noted that the restrictive covenant would “affect[] not only Dr. Golden’s employment at CEP itself, but also his [existing] and future employment at third-party facilities” where CEP provided services, even if the CEP services began after the commencement of Dr. Golden’s employment, and even if the CEP services did not compete with the services Dr. Golden provided.

The majority also rejected CEP’s argument that because Dr. Golden was no longer an ER surgeon, the restrictions in the settlement agreement would not substantially interfere with his ability to practice medicine. As the court noted, the agreement allowed CEP to terminate his employment at any facility where he worked in the ER or as a hospitalist.

Importantly, California courts have interpreted and applied Section 16600 and its related provisions strictly, noting that by its own language there are only two circumstances under which substantial restraints of trade are allowed: (1) where a person sells the goodwill of a business and (2) where a partner agrees not to compete in anticipation of dissolving a partnership.  Moreover, for decades California courts have held that, in light of the underlying policy favoring open competition and employee mobility, courts may reform (i.e. “blue pencil”) a contract only if a mistake was made and not to save an otherwise illegal contract.  Thus, because neither of the narrow exceptions to Section 16600 existed, the Ninth Circuit declared the entire settlement agreement void and unenforceable, and remanded the case to the district court to proceed accordingly.

The Takeaway

Golden reinforces, if not establishes, that even if they are contained within a settlement agreement, in California a restraint on future employment deemed substantial (basically, anything other than re-employment with the same employer) is not beyond the restrictive scope of Section 16600, regardless of whether it is “reasonable” or narrowly tailored.  Employers with operations in California must therefore be cautious in attempting to incorporate or enforce such provisions into a settlement agreement, even if such provisions would be wholly acceptable in other jurisdictions in which they operate.

Please contact the Jackson Lewis attorney with whom you work with questions about the decision or any other non-compete issues you may have.

Massachusetts Governor Signs Non-Compete Bill Into Law

Just before midnight on July 31, 2018, the last day of its legislative session, the Massachusetts Legislature passed a significant bill regulating the use of non-compete agreements in the Commonwealth.  Today, August 10, 2018, Governor Charlie Baker signed that bill into law.

In an article dated August 1, 2018, we examined the key aspects of the new law.  We identified certain issues with the law that might lead to inconsistent enforcement by the courts (e.g., ambiguous consideration requirements, a conflicting and potentially unenforceable venue provision, etc.).  Although Governor Baker could have rejected the bill or demanded further changes, it is no surprise that he signed it as written, given the amount of time, effort, and compromise that it took to get to this point.  Moving forward, we hope that the Legislature will pay close attention to the courts as they interpret the law, and push for amendments where they are needed.

Companies and other readers are encouraged to return to this Blog for periodic updates and analysis regarding the Massachusetts non-compete law, as well as to contact a Jackson Lewis attorney for related legal assistance in drafting, enforcing and interpreting non-competition agreements under Massachusetts law.

Massachusetts Non-Compete Law Reaches Governor’s Desk

Just before midnight on July 31, 2018, the Massachusetts Legislature passed a bill regulating the use of non-compete agreements in the Commonwealth. This development is a long time coming, as the Legislature had been attempting for nearly a decade to create a non-compete law.

In an article posted on our website on August 1, 2018, Erik Winton (Boston) and Colin Thakkar (Jacksonville) examine the details of the non-compete act, which is set to take effect on October 1, 2018. For guidance on how to comply with the new law, affected employers are encouraged to contact a non-compete attorney in Jackson Lewis’s Boston Office, including Erik Winton, Stephen Paterniti, and Sarah Herlihy.

Antitrust Director Signals Heightened Focus On Deterring No-Poach Agreements In Healthcare Industry

As we have reported in previous articles, the Department of Justice’s Antitrust Division has repeatedly reaffirmed its intent to criminally prosecute companies that restrict labor market competition through the use of unlawful no-poach and wage-fixing agreements. On May 17, 2018, a high-ranking Division official offered further guidance by announcing that the Division is taking a heightened look at unlawful no-poach agreements and other antitrust violations in the healthcare industry.

Antitrust Enforcement Policy In The Trump Era

On October 20, 2016, the DOJ and Federal Trade Commission released Antitrust Guidance for Human Resource Professionals, stating that agreements between companies to either prevent hiring from their respective workforces, or set artificial limitations on employee wages, would be subject to criminal prosecution if such agreements are not reasonably tied to a larger, legitimate collaboration between the companies (see our related article, dated November 9, 2016).  Approximately fifteen months later, on January 19, 2018, Assistant Attorney General Makan Delrahim confirmed that such Guidance remained in effect under the Trump Administration, and signaled that multiple enforcement actions were in the works (see our related article, dated January 25, 2018).

The Division partially delivered on that promise when, on April 3, 2018, it filed a consent agreement with two rail equipment supplier for maintaining purported naked no-poach agreements over a period of several years (see our related article, dated April 25, 2018).  Although the nature of that enforcement action was civil rather than criminal, the Division explained that it exercised such lenience only because the defendants discontinued the unlawful arrangements before the Division published its Antitrust Guidance.  Further, in a Division update dated April 11, 2018, which included a summary of the case, the Division offered the following warning:

Market participants are on notice: the Division intends to zealously enforce the antitrust laws in labor markets and aggressively pursue information on additional violations to identify and end anticompetitive no-poach agreements that harm employees and the economy.

Antitrust Official Offers An Update On Anticipated Enforcement Measures

On May 17, 2018, in remarks delivered at the American Bar Association’s Antitrust in Healthcare Conference, the Deputy Assistant Attorney General for the DOJ, Barry Nigro, reiterated the Division’s intent to initiate criminal enforcement actions in the near future, including in connection with unlawful no-poach agreements. Mr. Nigro further announced that during the week of May 7, 2018, the Division welcomed a new Acting Deputy Assistant Attorney General for criminal enforcement.  It is unclear from Mr. Nigro’s remarks whether there is any relationship between this change in leadership and the lack of any criminal actions to date.

In addition to signaling its general intent to initiate criminal enforcement actions, Mr. Nigro stated that the Division was placing priority status on violations in the healthcare industry. As Mr. Nigro explained, “few, if any, segments of our economy merit higher priority when it comes to antitrust enforcement, and healthcare has long been an enforcement priority for the Antitrust Division and our friends at the Federal Trade Commission.”

The bulk of Mr. Nigro’s speech was focused on consumer-related antitrust violations, like price fixing, bid rigging, and customer allocation agreements, as well as mergers that likely would lead to increased costs and reduced quality of medical care. In fact, he made just one passing reference to violations affecting the labor market, stating that the Division is “investigating other potential criminal antitrust violations in this industry, including … no-poach agreements restricting competition for employees.”  Therefore, one can only speculate as to when the Division will initiate criminal enforcement actions in connection with a no-poach and/or wage-fixing agreement, as well as which industry will be targeted first.

We are following this topic closely and will update readers on any significant developments. Until then, companies are encouraged to contact a Jackson Lewis attorney for strategies on how to maintain a stable workforce and determine employee wages without running afoul of the antitrust laws.

Department Of Justice Fires Warning Shot Over Unlawful No-Poach Agreements

On April 3, 2018, the Department of Justice’s Antitrust Division settled an antitrust action against the world’s two largest rail equipment suppliers, accusing them of maintaining “naked” no-poaching agreements in violation of the Sherman Act (see Complaint and Consent Decree). Although the civil enforcement action falls short of the agency’s recently-stated inclination to criminally prosecute such agreements, a closer review of the circumstances offers some insight to the agency’s strategies with respect to both the litigation and settlement of such cases.

The Antitrust Division’s Position Toward Horizontal No-Poach Agreements

There is no federal law that prohibits a company from entering into a contract with one of its employees to restrict the post-separation recruitment of co-workers to a competing company. However, no-poach agreements between companies (horizontal agreements), that are not reasonably tailored to support a broader, legitimate business collaboration, are generally viewed as antitrust violations under the Sherman Act.

On October 20, 2016, the DOJ and Federal Trade Commission released Antitrust Guidance for Human Resource Professionals, alerting companies that “naked” no-poach agreements – agreements that are not part of a broader, legitimate business collaboration – constitute per se antitrust violations and would likely be prosecuted criminally, rather than civilly (see our related article, dated November 9, 2016).  More recently, on January 19, 2018, the head of the Antitrust Division, Makan Delrahim, announced that the agency would continue to follow its 2016 Guidance notwithstanding the change in administrations (see our related article, dated January 25, 2018).  Further, Mr. Delrahim disclosed that the agency was already preparing criminal cases against multiple businesses and expected to commence litigation imminently.

Enforcement Action Against Knorr and Westinghouse

The recent enforcement action arose out of a series of alleged no-poach agreements between: (1) Knorr-Bremse AG (“Knorr”) and Westinghouse Air Brake Technologies Corporation (“Wabtec”); (2) Knorr and Faiveley Transport S.A. (“Faiveley”); and (3) Wabtec and Faiveley. Specifically, Knorr, Wabtec and Faiveley allegedly agreed to not solicit, recruit, or hire each other’s employees without the existing employer’s express permission.  According to the Complaint, executive leadership of the defendants actively and strictly enforced the agreements.

The alleged pacts continued until approximately July 2015, when Wabtec announced its upcoming acquisition of Faiveley, whereupon Knorr allegedly called on its workforce to raid Faiveley of its most skilled employees.  Ironically, the agency did not discover the agreements until shortly thereafter, when it was reviewing the Wabtec/Faiveley merger.

The agency filed suit against Knorr and Wabtec for violation of Section 1 of the Sherman Act, 15 U.S.C. §1, alleging “a series of unlawful agreements … to restrain competition in the labor markets in which they compete for employees.” However, it did not proceed criminally, due to the fact that the defendants had discontinued the agreements prior to the 2016 Guidance.  In announcing the enforcement action, the agency confirmed that as a matter of prosecutorial discretion, it would only pursue criminal action against businesses that were believed to have maintained naked no-poach agreements after the issuance of the 2016 Guidance.

In the consent agreement, the agency negotiated two provisions that reflected a change from the Obama Administration. First, whereas past consent agreements generally called for open-ended agency review of the offending businesses’ competitive activities, this agreement contained a sunset clause calling for the agency oversight to terminate in the absence of further violations.  Second, the agreement lowered the agency’s required standard of proof – down from clear and convincing to the preponderance of the evidence — when establishing a violation of the terms of the agreement.  In other words, while the agreement reduces agency oversight, it makes it easier for the agency to enforce the settlement if there are any further no-poach agreements.

The Road Ahead

Given Mr. Delrahim’s January 2018 comments, we anticipate that the agency will soon initiate one or more criminal actions in relation to alleged naked no-poach agreements that took place after the 2016 Guidance was published.  Meanwhile, the popularity of private civil actions should only continue to increase.  For instance, on April 11 and April 23, 2018, employees in Pennsylvania and Maryland, respectively, filed federal class action lawsuits against Knorr and Wabtec, based on the same conduct alleged in the Agency’s Complaint.

Companies are encouraged to contact a Jackson Lewis attorney with questions about compliance with antitrust laws as relate to non-solicitation of employees agreements.

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.

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