Larry Del Rossi published an article for Today’s General Counsel titled, “Recent Scrutiny of Non-Competes.” Larry provides an overview of non-compete agreements (also known as restrictive covenants) and discusses a recent uptick in government activity that may regulate or challenge private businesses’ use and enforcement of non-competes.
Larry says “one major challenge for national companies is that enforcement of non-competes varies from state to state, so that there is no uniform standard.” In May 2016 the White House issued “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” a document intended to identify areas where implementation and enforcement of non-competes may present issues, put forward a set of best practices, and serve as a call to action for state reform.
Continue reading “Recent Scrutiny of Non-Competes”
For more than 400 years, private businesses have used non-compete agreements in one form or another to protect their legitimate business interests, such as long-standing customer relationships, investment in specialized training, or development of trade secrets. They are commonplace in many employment contracts in a variety of industries ranging from retail, insurance, healthcare, financial services, technology, engineering, and life sciences. Some state legislatures and courts have curtailed their use in certain industries or professions. California, for example, prohibits them unless limited exceptions apply. Cal. Bus. Code §16600. Most states prohibit them for legal professionals. Many courts can modify or “blue pencil” them if the restrictions are found to be broader than necessary to protect an employer’s legitimate business interests.
Historically, federal and state agencies have generally stayed out of the mix in terms of regulating or challenging private businesses’ use and enforcement of non-competes. However, a recent uptick in government enforcement activity suggests a new wave of challenges is on the horizon for employers.
Continue reading “What Employers Need to Know about the Government’s Recent Scrutiny of Non-Competes”
In a world where employee mobility is a business reality, companies should be taking proactive measures to guard trade secrets, retain competitive advantage and be ready for court if it comes to that. Click below to launch a video and hear from Labor & Employment partners Mark Terman and David Woolf on what they, and our other Labor & Employment group lawyers, are doing every day to protect companies.
The Pennsylvania Superior Court recently reaffirmed Pennsylvania’s longstanding position that employers must provide valuable consideration to employees who enter into noncompete agreements. In a case of first impression, the court held that a statement in a noncompete agreement with an existing employee that the parties “intend to be legally bound,” as set forth in the Uniform Written Obligations Act (“UWOA”), does not constitute adequate consideration.
In Socko v. Mid-Atlantic Systems of CPA, Inc., the employer argued that its noncompete agreement with a former employee was enforceable because the agreement expressly stated that the parties “intend to be legally bound.” The former employee entered into the agreement after he began working for Mid-Atlantic Systems of CPA, and he did not receive any benefit or change in job status in exchange for signing the noncompete. The employer argued that the language itself sufficed to enforce the agreement because Section 6 of Pennsylvania’s UWOA prevents the avoidance of a written agreement for lack of consideration if the agreement contains an express statement that the signer intends to be legally bound.
The court rejected the employer’s argument, pointing to Pennsylvania’s established view of restrictive covenants as a disfavored restraint of trade and significant hardship on bound employees. Accordingly, Pennsylvania courts have long held that noncompete agreements must be supported by valuable consideration, even though other types of contracts may be upheld by continuation of at-will employment, contracts under seal, or nominal consideration.
Employers seeking to enforce noncompete agreements in Pennsylvania are now on notice that language stating that “the parties intend to be legally bound” will not relieve them of the requirement to provide actual and valuable consideration to employees in exchange for execution of the agreement. If an employee signs the agreement at the start of employment, then the consideration is the job itself. When the employment relationship already exists, however, employers must provide consideration in the form of benefits—such as raises or bonuses—or a change in job status, i.e., a promotion.
Partners in the firm’s Los Angeles office recently presented to the Southern California Chapter of the Association of Corporate Counsel a program titled “What Happens at Work Stays at Work – The California Employer’s Approach To A National Program for Restrictive Covenants and Trade Secret Protection.”
The presentation, which was broadcast to in-house counsel viewing in three separate locations spread out around southern California, first looked at the California landscape, giving a refresher and update on non-competition agreements, customer and employee non-solicitation, identifying and pleading trade secrets and misappropriation.
The presentation then looked at considerations for a multi-jurisdictional approach to trade secret protection, including best practices for effective corporate policies and confidentiality and property protection agreements.
The presentation concluded by addressing social media in a trade secret protection program, including Twitter, LinkedIn, and BYOD, and making the most of choice of law and forum selection clauses in restrictive covenants.
A copy of the presentation can be downloaded here.
Perhaps your company has just acquired a new business and wants to put that entity’s employees under a more structured employment arrangement. Or maybe you are just looking to roll out new executive-level agreements within your own company. Whatever the motivation and circumstances, here are ten things to think about in drafting employment agreements that often go overlooked:
- Severance – The most common question is the easiest: Are you going to provide severance and, if so, how much? Other details merit consideration though. For example, is death or disability a severance trigger? As part of the package, do you want to provide things like medical benefit continuation, prorated bonus, equity vesting acceleration, extension of the option exercise period, or other benefits? Whatever you do, the employer will want to make sure that the executive has to execute a release to receive the severance benefits, other than vested benefits and accrued compensation.
- Fixed Term (or Not) – Traditionally, a term contract was like a baseball contract – the executive had a term and, except where the employer had good cause for an early termination, it had to pay the executive out through the end of the term no matter what. That concept seems to have largely disappeared, in that (a) employers don’t want to be saddled with paying out the full term if they elect to make a change earlier and (b) executives want severance even when the agreement expires naturally and is not renewed by the company. As a result, except where the employer can secure a true no obligation walk away at the end of the term, or at least establish some difference between an in-term and end-term separation, an employer would be wise to go with an at-will arrangement with no set term.
- Restrictive Covenants (or Not) – Restrictive covenants, including covenants not to compete, require clearer, more definitive consideration than most contract terms. And aside from new employment, there is no better consideration than new or enhanced compensation and benefits memorialized in a formal employment agreement. So, if you think non-competition, customer non-solicitation, or other restrictive covenants are worthwhile (and you usually should at the executive level), the employment agreement (or a separate, contemporaneously-executed and cross-referenced restrictive covenant agreement) is the place to do it.
- Cause – “Cause” means different things to different people. From an executive’s point of view, Cause is often engaging in particularly serious conduct that is not rectified after notice and an opportunity to cure. Employers, however, should seek to include things like the executive’s failure to perform his or her duties; violation of material company policies (such as anti-discrimination and harassment policies); commission of a felony or other serious crime; breach of his or her restrictive covenants, fiduciary duty, or other misconduct; and material misrepresentation of experience or education, among other things.
- Good Reason Provision (or Not) – A “Good Reason” separation provision allows an executive to resign for certain preapproved reasons – typically the employer’s material breach of the employment agreement, a required relocation, or a material diminution of the executive’s duties, often after the employer has failed to cure – and collect severance as if he or she was fired without Cause. Most savvy executives have come to expect such a provision, and providing it to the executive can be a relatively easy give if the Good Reason provision is drafted correctly.
- Award Equity (or Not) – Many executives, particularly when accepting a role in a new or newly-acquired company, understand that the cash compensation may be limited initially. What they really want is equity or options so that, if they succeed in developing the company, they can share in that success. Employers and equity firms often find this arrangement beneficial too in that it limits cash outlays and aligns incentives.
- State Law and Venue Selection – Almost all employment agreements include a choice of law provision, and many, if not most, employers instinctively select the state in which the company operates and the executive will work. But that may not be the best law for the employer and other options may be available. For example, most courts will apply another state’s law if there is a nexus to that state, such as it being the employer’s state of incorporation. Venue is equally important, as requiring an employee to litigate in a certain forum can give the employer litigation location certainly and potentially avoid the executive running to another state where the law (for example, concerning non-competes) is more favorable.
- Assignment – Often forgotten, the assignment provision is critical in that, without it, many states’ laws will not permit assignment, even upon a sale of the employer’s assets. To avoid this, the employment agreement should state that, although the executive may not assign the agreement, the employer may do so, at least to an affiliate or as part of a transaction.
- 409A – When possible, severance, other payments and the agreement generally should be structured so as not to trigger coverage under Section 409A of the Internal Revenue Code. If the agreement is subject to Section 409A, it should be written to comply with it. Failure to do so can expose the executive, among other things, to a 20 percent additional tax and the employer to an angry executive.
- Miscellaneous – There are of course numerous other things of value that an employer can do. For example:
● The salary section can allow for the reduction of the executive’s salary when executive salaries are being cut across the board.
● The employer may want to make any bonuses contingent on the executive working through the end of the year.
● In most states, an employer can provide that accrued, unused vacation and PTO will not be paid out upon termination of employment.
● Arbitration, subject to a carve out for injunction actions, has its positives and negatives and should be considered.
● Address what is to happen upon a sale of the employer or other change of control.
● New executives should represent and warrant that they are not bound by any restrictive covenants that would limit their ability to work for the employer and that they will not use any confidential information from their former employer.
● Although largely standard now, employers should take care to ensure that the agreement provides that it can be revised only by written document.
● Make sure the agreement works with other documents and that the integration clause doesn’t unintentionally overwrite other agreements.
There are always more issues of course, particularly those specific to the particular company and the executive. But the ten-plus areas above arise frequently and thus typically merit consideration.