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.

Clear as Mud: Illinois Courts Continue to Grapple With The “Adequacy” Of Consideration for Non-Compete Agreements

It is axiomatic that a contract requires consideration to be binding. Ordinarily, courts only inquire into the existence, but not the “adequacy,” of consideration.  Illinois courts, however, also scrutinize the adequacy of consideration when it comes to determining whether restrictive covenant agreements qualify as an enforceable contract.  Absent adequate consideration for the restrictive covenant, there is no contract, and the court never gets to the question of whether the restrictions are otherwise reasonable and enforceable.

Since the 2013 Illinois appellate court decision in Fifield v. Premier Dealer Services, Inc., state courts in Illinois have consistently held that, absent 2 years of continued employment after the restrictive covenant is signed, additional consideration beyond simply continued employment is required; whether such additional consideration is adequate is determined on a case-by-case basis.  In contrast, the federal courts in Illinois have quarreled with the Fifield decision and its progeny, usually finding that the 2-year requirement is not a “bright line” test for adequacy of consideration, and then engaging in an analysis as to whether the amount of continued employment in the particular case was “substantial” enough to qualify as adequate consideration.  This state-vs-federal court distinction persists, as revealed in two recent cases.

On October 20, 2017, the federal court for the Northern District of Illinois again announced that it did not consider the 2-years-continued-employment to be a bright-line test for the adequacy of consideration. In Stericycle, Inc. v. Simota, Case No. 16 C 4782, the court held that the enforcement a non-compete supported by continued employment requires an individualized, case-by-case assessment, and is not subject to a bright-line rule.

Factually, the Court noted that in February 2015, approximately one month into their employments with Stericycle, Donald Simota, Dana Sullivan, and Chad Van Houton signed employment agreements prohibiting them from soliciting any Stericycle customers or employees for twelve months following their separations from the company. Two months later, Simota signed a separate agreement with an additional prohibition against general competition for the same twelve-month period.

In March 2016, Simota, Sullivan and Van Houton tendered their resignations from Stericycle. Shortly thereafter, they allegedly commenced employment with a competitor, solicited customers of Stericycle, and solicited at least one Stericycle employee to join them in their new venture.  Stericycle promptly filed suit for breach of contract, and in July 2016, the three defendants moved for dismissal of the complaint.  As a basis for dismissal, the defendants argued that even if Stericycle’s accusations were true, they did not work for the company long enough to be bound by the applicable non-solicit and/or non-compete covenants.

In reviewing the motion to dismiss, the court noted that the defendants’ employment with Stericycle lasted for approximately thirteen months after they signed the non-solicit agreement, and for approximately eleven months after Simota signed the separate non-compete agreement. The court further noted that three recent Illinois appellate court decisions “appear[ed] to adopt” a “bright-line rule” that at-will employment must continue for two years in order to constitute adequate consideration for post-employment restrictions on solicitation and/or competition.  Ultimately, however, the court denied the motion to dismiss, based on the prediction that the Illinois Supreme Court would reject the two-year rule.

As the court explained, “a promise of continued employment may be an illusory benefit where the employment is at-will.” For that reason, “at-will employment [must] continue for a ‘substantial period’ after an employee signs a restrictive covenant” in order to qualify as adequate consideration for the covenant.  The court added, however, that while two years of employment would normally be sufficiently “substantial” to support a restrictive covenant, it did not follow that “anything less than two years is automatically insufficient.” Rather, the court advocated a “fact-specific approach” that takes into account not only the length of employment but also various other factors, including “the circumstances surrounding the employee’s signing of the covenant, the conditions of his employment, and his termination.”  In the case of Simota, Sullivan, and Van Houton, the court considered “the length of their employment and that all three resigned,” and concluded that their employment “continued for a ‘substantial period’ under Illinois law.”

Only 11 days later, on October 31, 2017, an Illinois appellate court affirmed the dismissal of a non-compete claim in Automated Industrial Machinery, Inc. v. Christofilis, No. 2-16-0301, where the lower court found inadequate consideration based on the two-year bright-line rule.  Although the appellate court noted the “possibility” that the Illinois Supreme Court might ultimately reject the two-year rule, it pointed out that the defendant in that case only worked for five months after signing his non-compete agreement – a duration the court found to be insufficient under any standard.  Importantly, the court also rejected the former employer’s argument that the non-compete was supported by additional consideration beyond just continued employment, pointing to the fact that no other consideration was specified in the agreement.

The lesson for employers, once again, is that drafting matters. For example, enforceability may be enhanced if the agreement with the employee spelled out what the employee is receiving beyond mere employment in exchange for the employee’s covenants not to compete or solicit.  For guidance on how to navigate the “adequacy of consideration” issue in Illinois, please contact a member of Jackson Lewis’s Non-Competes Practice Group.

Georgia Court of Appeals Confirms Non-Solicitation of Employees Covenant Need Not Have Geographic or Material Contact Language

As previously noted in Jackson Lewis’ Non-Compete & Trade Secrets Report, Georgia adopted legislation governing restrictive covenant agreements entered into on or after May 11, 2011. This law, however, does not address employee non-solicitation (i.e., anti-pirating) covenants, leaving courts to apply common law to such restrictions.  Georgia common law can be confusing and even contradictory on certain issues, such as whether an anti-pirating covenant must be limited to a specific geographic territory or to employees with whom the covenanting employee had contact.  The Georgia Court of Appeals for the Fourth Division addressed both issues in a recent decision, CMGRP, Inc. v. Gallant, No. A17A1168 (Ga. Ct. App. Oct. 4, 2017).

Gallant began working for a unit of CMGRP in October 2008.  On October 7, 2008, she executed an employment agreement prohibiting her from “recruiting or hiring any employee of [CMGRP] for a period of one year following her resignation.” Notably, this anti-pirating covenant was not limited to a particular geographic territory or to employees of CMGRP with whom Gallant had any contact or relationship.

The trial court initially rejected the anti-pirating covenant because it was not limited to employees with whom Gallant had established relationships at CMGRP.  The Court of Appeals reversed the trial court’s order, however, based on prior holdings in which it “repeatedly upheld employee non-recruitment provisions that were not limited to employees with whom the former employee had an established relationship.”  Notably, the Court acknowledged a seemingly contradictory decision in which it criticized a non-solicitation covenant for prohibiting the solicitation of employees with whom the employee had no prior contact. The Court explained that the matter at issue in that case was actually a separate non-compete covenant, and its discussion of the non-solicitation covenant was merely “dicta” that “lack[ed] the force of an adjudication.”

In addition to challenging the anti-pirating covenant’s application to employees with whom she had no established relationship, Gallant also argued the pirating covenant was unenforceable because it lacked a geographic territory.  Though she ultimately abandoned that argument, the Court of Appeals found it “worth noting that this Court has upheld employee non-recruitment provisions that lacked a geographic limitation.”

This is a pro-employer decision, as the Court was clear that an anti-pirating covenant need not be limited to a particular geographic territory or to employees with whom the soliciting employee had material contact.  Moreover, because Georgia’s recent restrictive covenant legislation does not apply to anti-pirating covenants, the Gallant decision is instructive in all cases involving such covenants, regardless of the date of the agreement.  Employers should be aware, however, that other courts of appeals in Georgia have issued conflicting holdings, and those courts are not bound by the ruling in Gallant.  For assistance in drafting legally enforceable restrictive covenant agreements, please contact a member of Jackson Lewis’s Non-Competes Practice Group.

Continued Employment Isn’t Always Sufficient – Minnesota Requires Additional Consideration For Non-Compete With Current Employee

The Minnesota federal district court recently refused to enforce a non-compete agreement, in part, because the employer failed to establish that the agreement was supported by valuable consideration.  The decision, issued on October 6, 2017 in Mid-America Business Systems, v. Sanderson et. al., Case No. 17-3876, serves as an important reminder that, in Minnesota, there can be no shortcuts with restrictive covenant agreements.   New employees must be presented with the non-compete agreement before accepting an offer of employment.  Further, existing employees must receive something of additional value, beyond continued employment, as consideration.

By way of background, Mid-America Business Systems (“Mid-America”) claimed in its TRO request that it hired Kevin Sanderson as a temporary employee, subject to an “unwritten” probationary period. Mid-America did not require Sanderson to sign a restrictive covenant agreement when it first hired him.  Months later, however, Mid-America allegedly converted Sanderson to a permanent position and required him to sign a non-compete.   Mid-America stated that in consideration for signing the agreement, it increased Sanderson’s pay, provided him additional training, and gave him access to confidential information.  In response, Sanderson denied that any increases in pay, training or access to information were tied to a non-compete, and further denied knowledge of any probationary period.

In rejecting the TRO request, the court concluded that Mid-America failed to prove the agreement was supported by adequate consideration. Importantly, the court agreed that increases in status, pay, and/or training could constitute adequate consideration for a post-hire non-compete.  However, it found that Mid-America failed to demonstrate that it informed Sanderson of the alleged probationary period, or of any connection between the agreement and the alleged additional consideration.   Therefore, for purposes of awarding injunctive relief, the court deemed the non-compete to be unenforceable.

For employers operating in Minnesota, the takeaway from this decision is that courts will look carefully for proof of adequate consideration before enforcing a non-compete agreement. In particular, when asking an existing employee to sign a non-compete, employers must offer additional consideration beyond continued employment, and must ensure that the employee understands the terms of agreement.  The absence of clear documentation seemed to be a critical factor in this case.  Please contact a member of Jackson Lewis’s Non-Competes Practice Group for further assistance in making your company’s non-compete agreements stick.

Virginia Uniform Trade Secrets Act Prohibits Improper Acquisition of Trade Secrets, Regardless of Subsequent Use

Misappropriation of trade secrets claims can sometimes be difficult to sustain. While evidence of the taking of a trade secret may be available, evidence of its subsequent use may not.  In Integrated Global Services, Inc. v. Michael Mayo, Case No. 3:17cv563, by decision issued on September 13, 2017, the federal court for the Eastern District of Virginia entered a preliminary injunction against a former employee, after concluding that he had likely misappropriated the company’s trade secrets in violation of the Virginia Uniform Trade Secrets Act (“VUTSA”).  The opinion is particularly notable for its conclusion that the mere acquisition of a trade secret by improper means constituted an unlawful misappropriation under the VUTSA, regardless of whether the defendant actually used the trade secrets or disclosed them to third parties.

The former employee, Michael Mayo, held a management position with Integrated Global Services, Inc. (“IGS”) until his involuntary termination on June 21, 2017. In that role, Mayo evaluated work proposals; assisted in the development of project estimates, bids and proposals; and interacted extensively with customers.  Those activities allegedly afforded Mayo access to IGS’ “technical, engineering, sales, customer, budget, manpower, and cost and pricing information.”  IGS took various measures to ensure the confidentiality of that information, including limiting accessibility to only employees who needed the information to perform their jobs, as well as requiring those employees to sign detailed confidentiality agreements.

For nearly one month after his termination, IGS claims Mayo ignored repeated requests for the return of his company-issued laptop and phone. Further, when IGS finally received the property, it allegedly discovered that Mayo “wiped” his phone of company data in the days following his termination, as well as copied and deleted numerous files of highly sensitive information from the laptop.  IGS also allegedly learned that Mayo was going to work for a competitor and had been in discussions with competitors prior to returning the laptop and phone.  IGS quickly filed suit under the VUTSA and moved for a preliminary injunction, requiring the immediate return of any IGS documents and strict compliance with the terms of his Confidentiality Agreement.

The Uniform Trade Secrets Act is a model statute for the protection of trade secret information that has been adopted, to varying degrees, by 48 states and the District of Columbia. Virginia’s version, the VUTSA, defines a prohibited “misappropriation” as “[a]cquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means” or “[d]isclosure or use of a trade secret of another without express or implied consent by a person who … [u]sed improper means to acquire knowledge of the trade secret.”

In granting IGS’ request for a preliminary injunction, the court held that IGS established a likelihood of success on its VUTSA claim by submitting credible evidence that Mayo (1) copied electronic trade secret data from his company-issued laptop to an external memory device, and (2) used “improper means” to do so (by copying the data after his termination date, despite knowing that his actions were prohibited by the Confidentiality Agreement). Importantly, the court specifically held that the statutory definition of “misappropriation” did not require IGS to prove that Mayo had actually used the copied data files against IGS.

When a company learns that a former employee has left with valuable trade secret information, there is often an immediate need to secure the information before any material damage has been done.  The above decision demonstrates that in Virginia at least, companies can pursue enforcement actions against the former employee without having to wait for damage or threatened damage to occur.  Please contact a member of Jackson Lewis’s Non-Competes Practice Group for further assistance in protecting your company’s trade secrets.

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