If there was any question about whether there is a growing national trend to limit the enforceability of noncompetition agreements, 2019 settled the matter. Seven states enacted new statutes designed to limit the circumstances in which noncompetition agreements may be used. The Federal Trade Commission (FTC) announced that it is considering a regulation to restrict the use of noncompete clauses in employment agreements, and Republican lawmakers on Capitol Hill have held hearings and introduced legislation to create a federal ban on certain noncompete restrictions.
The following is a summary of the top 10 noncompete law developments of 2019. These developments reflect an ever-increasing hostility by lawmakers and courts toward noncompetition agreements. They also demonstrate the need for employers to stay current on the diverse state-specific limitations governing restrictive covenants, new federal activity in the area and ongoing case law developments. In light of this trend, national employers would do well to: be selective in identifying those categories of employees required to sign such agreements; narrowly tailor the scope of such agreements; and rely on choice-of-law and venue provisions, as allowed, to maximize the chances of enforceability.
- Maryland, New Hampshire and Rhode Island Enact Legislation Prohibiting Restrictive Covenants with Low-Wage Employees
In May 2019, New Hampshire enacted a statue which forbids employers from utilizing noncompete agreements for “low-wage employees.” The Act defines low-wage employees as having an hourly wage less than or equal to 200% of the federal minimum wage (i.e., $14.50 or less per hour) or an hourly rate less than or equal to 200% of the tipped minimum wage pursuant to RSA § 279:21 (or, $6.54 or less per hour). The Act defines “noncompete agreements” narrowly, as an agreement between an employer and a low-wage employee that restricts the employee from working for another employer for a specified period of time, working in a specific geographical area or working for another employer in a similar position. The statute does not address other forms of restrictive covenants, such as nonsolicitation or confidentiality agreements. The Act became effective on September 8, 2019.
Maryland enacted a similar law, which became effective on October 1, 2019. The Noncompete and Conflict of Interest Clauses Act prohibits Maryland employers from using noncompetes to restrict low-wage employees (defined as those employees earning equal to or less than $15 per hour or $31,200 annually) from obtaining similar employment with a new employer. Notably, the Act does not restrict an employer’s ability to use restrictive covenants to protect confidential information and trade secrets. Specifically, the Act does not apply to employment contracts “with respect to the taking or use of a client list or other proprietary client-related information.” The Act contains no language indicating how it will be enforced, thus leaving unanswered questions as to how this law will actually impact employers.
Finally, in January 2020, the Rhode Island Noncompetition Agreement Act will prohibit employers from entering into noncompetition agreements with certain types of workers, including:
- Employees classified as nonexempt under the Fair Labor Standards Act.
- Undergraduate or graduate students participating in internships or short-term employment, while enrolled at an educational institution.
- Employees 18 years old or younger.
- Low-wage employees.
The Act specifically exempts certain types of restrictive covenants, including: nonsolicitation agreements; sale-of-business noncompetes; confidentiality agreements; and noncompete agreements made in connection with a separation from employment, as long as the employee receives seven business days to rescind acceptance. The Rhode Island law also does not preclude employers from utilizing restrictive covenants to protect trade secrets.
- Maine Imposes Harsh Restrictions on the Use of Noncompetes
Effective on September 18, 2019, the Act to Promote Keeping Workers in Maine imposes extensive restrictions on the use of noncompetes in-state. The statute prohibits employers from requiring, or even permitting, an employee earning wages less than 400% of the federal poverty level to enter into a noncompete agreement. The statute also imposes a notice requirement on employers and includes the following stipulations:
- Employers must disclose in any advertisement for a position that will require acceptance of a noncompete that the employer will require such acceptance.
- At least three business days before an employer will require an employee or prospective employee to execute a noncompete, the employer must provide an actual copy of the noncompete agreement to allow time for the employee the negotiate its terms.
- Except for noncompetes between an employer and an “allopathic” or “osteopathic” physician, the terms of a noncompete agreement do not take effect until one year after the employee’s employment begins, or 6 months from the date the agreement was signed, whichever comes later.
The statute further prohibits “restrictive employment agreements,” which are defined as agreements between two or more employers that prohibit or restrict an employer from soliciting or hiring another employer’s employees or former employees. Employers may not enter into these agreements, nor may they threaten to enforce them.
Finally, the Maine Act imposes a monetary penalty of at least $5,000 for violations.
- Washington Enacts Legislation Limiting Restrictive Covenants With Employees and Independent Contractors
On January 1, 2020, a Washington law will go into effect which places significant and highly detailed restrictions on the use of noncompetes. Under this law, noncompetes are unenforceable against an employee:
- Unless the employer discloses the terms of the noncompete in writing no later than the time the offer of employment is accepted.
- If the noncompete is entered into after employment begins, unless the employer provides independent consideration.
- Unless the employee’s earnings exceed $100,000 annually.
- If the employee is terminated through a layoff, unless enforcement of the noncompete includes compensation equivalent to the employee’s base salary for the period of enforcement.
The Act also limits the use noncompetes with independent contractors. Under the Act, noncompetes are unenforceable against independent contractors unless the independent contractor’s earnings exceed $250,000 per year.
The Washington Act applies to a broad range of restrictive covenants. In addition to the traditional noncompete agreement, the Act also applies to nonsolicitation agreements, confidentiality agreements, any covenant that prohibits the use or disclosure of trade secrets, sale-of-business noncompetes, and covenants entered into by a franchisee.
- Oregon Adds New Disclosure Requirement for Employers
Oregon added yet another restriction for employers using noncompetes. Employers must now provide a written copy of the noncompete agreement within 30 days of an employee’s termination. This Act applies to any noncompetition agreement entered into on or after January 1, 2020.
This new requirement comes in addition to Oregon’s existing law, under which noncompetition agreements are unenforceable unless:
- The employee is exempt from minimum wage and overtime.
- At the time of termination, the employee’s salary exceeds the median income for a family of four according to the U.S. Census Bureau.
- The employer has a protectable interest, such as trade secrets.
- The agreement is executed at the beginning of employment and the employer provides notice of the noncompete at least two weeks before employment begins.
- The agreement is effective for less than 18 months from the date of termination.
- Utah Amends Law Governing Noncompetes in Broadcast Industry
Effective May 14, 2019, Utah amended its law governing noncompete agreements to provide that noncompete agreements between a broadcasting company and a broadcasting employee must be part of a written contract of reasonable duration based on:
- Industry standards.
- The employee’s position.
- The employee’s experience.
- The unique circumstances of the parties to the contract.
The amendment replaces the previous requirement that, in order to be valid, such contracts containing noncompete agreements must not have a duration of more than four years.
- The FTC Announces That it has Begun Consideration of a Rule to Restrict the Use of Noncompete Agreements
In July 2019, 18 Attorneys General (all Democrats) jointly submitted a comment letter to the FTC urging it to crack down on the expanding use of noncompetition agreements. The Attorneys General urged the FTC to treat noncompete agreements that entrench monopoly power as potential violations of Section 2 of the Sherman Anti-Trust Act. The Attorneys General also recommended that the FTC use its authority to stop noncompete, nonsolicitation and non-poaching agreements in many situations, including banning intra-franchise no-poach agreements and noncompete agreements for low-wage workers. In response, the FTC (which is led by a majority of Republican commissioners) agreed to hold a workshop on January 9, 2020 “to examine whether there is a sufficient legal basis and empirical economic support to promulgate a Commission Rule that would restrict the use of noncompete clauses in employ[ment] contracts.”
- Senators Reintroduce Bipartisan Bill That Would Prohibit Employers From Enforcing or Threatening to Enforce Noncompetition Agreements
Further reflecting the growing bipartisan support of federal initiatives to impose national restrictions on the use of noncompete agreements, the Republican-controlled Senate Committee on Small Business and Entrepreneurship held a hearing in November 2019 entitled, “Noncompete Agreements and the American Worker.” Senator Marco Rubio, Chairman of the Committee, opened the hearing by referring to the “broad harm that noncompetes have caused the American working people” and the “need for federal action on noncompete agreements.”
Rubio further referred to pending legislation introduced by Senators Chris Murphy (D-Conn.) and Todd Young (R-Ind.). The proposed Workforce Mobility Act, which was previously introduced in 2018 but failed to advance, would generally prohibit employers from entering into, enforcing or threatening to enforce any noncompetition agreements other than those entered into through the sale of a business or through the dissolution of a partnership, and those narrowly designed to protect trade secrets. The bill delegates enforcement to the FTC and the Department of Labor, but also creates a private cause of action through which individuals could proceed with their own civil actions against employers that run afoul of the bill’s restrictions. Finally, the proposed legislation would require employers to make their employees aware of its requirements.
- California Court Holds Employee Nonsolicitation Agreements Unenforceable
In July 2018, a federal judge in the Northern District of California dismissed a former employee’s claims alleging that his former employer enforced an unlawful employment agreement, Barker v. Insight Global, LLC, No. 16-cv-07186-BLF, 2019 WL 176260 (N.D. Cal. Jan. 11, 2019). The court based its decision on longstanding California caselaw holding that employee nonsolicitation covenants are generally valid. Then, on November 1, 2018, the California Court of Appeals issued a new decision holding that an employee nonsolicitation covenant was unenforceable under California statute. Relying on this new caselaw, the federal court granted the plaintiff’s motion for reconsideration and reinstated the claims, reasoning that this California appellate decision invalidates employee non-solicitation provisions.
- The Delaware Chancery Court Issues Another Order Refusing to Honor a Delaware Choice of Law Provision
Historically, Delaware courts have been very deferential to Delaware choice of law provisions where at least one of the parties is a Delaware resident. However, recent case law has demonstrated the Delaware Chancery Court’s growing circumspection of such provisions. Most recently, in Nuvasive, Inc. v. Miles, et al, C.A. No. 2017-0720-SG (Del. Ch. Aug. 26, 2019) (Glasscock, V.C.), the court refused to honor a Delaware choice-of-law provision in a noncompete agreement involving a California employee. The court found it significant that the former employee/defendant resided in California, worked for the former employer/plaintiff in California and sought new employment in California. Because the former employer/plaintiff essentially sought to enforce the agreement to prevent the employee/defendant from competing in California, the Chancery Court concluded that California had a materially greater interest in the issue of enforcement and had a public policy which would render the noncompete void, and therefore refused to enforce the Delaware choice-of-law provision.
Notably, recent decisions by the Delaware federal district court in 2019 suggest that the Delaware federal court might be more receptive to Delaware choice of law provisions. For example, in W.R. Berkley Corp. v. Niemela, 2019 WL 5457689 (D. Del. Oct. 24, 2019), the district court honored a Delaware choice-of-law provision in an employment agreement containing an anti-recruitment provision, even though the former employee/defendant resided in California, signed the agreement in California, and headquartered his competing business in California. The court found that because Berkeley is a Delaware entity (though headquartered in Connecticut) and the parties agreed to the choice-of-law provision, the provision should be honored. Similarly, in Advanced Reimbursement Management, LLC v. Plaisance, et al., 2019 WL 2502931 (D. Del. June 17, 2019), the court honored a Delaware choice-of-law provision in a noncompete agreement where the employer/plaintiff was incorporated in Delaware (though headquartered in Georgia). The court agreed that absent the choice-of-law provision, Louisiana law would govern because the former employees/defendants were employed in Louisiana, signed the agreement in Louisiana and their alleged competing business was in Louisiana. Nonetheless (and despite the fact that Louisiana law is much harsher with respect to the enforceability of noncompete agreements), the court found that Louisiana did not have a materially greater interest than Delaware, particularly where this was not a dispute between Louisiana citizens.
- New Jersey Appellate Court Reminds Us That Options Exist Outside of Noncompetition Agreements
In a decision published on February 26, 2019, the New Jersey Superior Court’s Appellate Division reversed the dismissal of an employer’s claims against two former employees stemming from a breach of the duty of loyalty, Tech. Dynamics Inc. v. Master, No. A-0952-17T3, 2019 BL 61679 (N.J. Super. Ct. App. Div. Feb. 26, 2019). The appellate court noted that a claim against an employee for breach of duty of loyalty does not require the existence of an oral or written agreement. Rather, although the non-existence of a written agreement is a relevant consideration, it does not necessarily bar a claim for breach of duty of loyalty.
The appellate court also noted that, although employees are permitted to make preparations to start a competing business while still employed, the employee may not breach his or her duty of loyalty while still employed by soliciting the employer’s customers or engaging in other secret competition. This case serves as a reminder that, even amidst the strengthening national movement against non-competition agreements and other restrictive covenants, employers may have other means available to protect themselves.
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