2022 was a relatively quiet year in terms of noncompete developments. However, both state legislatures and courts continued to take steps to narrow the circumstances under which noncompetition and employee non-solicitation agreements may be enforced. As such, employers remain well advised to continue to: (1) be selective in identifying those categories of employees required to sign noncompete agreements; (2) rely on choice of law and venue provisions as allowed to maximize the chances of enforceability; (3) keep a keen eye on statutory developments; and (4) avoid no-poach agreements with other employers.
New Colorado Law Takes Effect. Colorado’s new law restricting the circumstances in which an employer may enter into a noncompete or customer non-solicit agreements went into effect on August 10, 2022. Among other things, the new law makes it unlawful to enter into a noncompetition or customer non-solicitation agreement outside of the context of: (a) a sale of business transaction; or (b) a contract for the protection of trade secrets involving highly compensated workers. As to the second exception, noncompete agreements can now only be entered into with workers earning at least $101,250 annually in 2022, and customer non-solicit agreements can only be entered into with workers earning at least $60,750 annually in 2022. These numbers will be adjusted annually. In addition, an employer must provide prior notification of such agreements before the worker accepts an employer’s offer of employment or (in the case of a worker who is already employed) 14 days before the earlier of the effective date or the providing of consideration. The notification must be in a separate document that identifies the type of restriction, where in the agreement the restrictions are located, and include a copy of the agreement. The worker must sign the notice, proving that it was duly provided. Finally, the law provides that Colorado law will govern the enforcement of all such agreements for persons who work and live in Colorado at the time their employment ends, regardless of any contrary choice-of-law provision and prohibits the enforcement of agreements outside of Colorado against a worker who primarily resided or worked in Colorado at the time of their employment termination.
New D.C. Law Goes into Effect. After significant pushback from industry groups, the District of Columbia Council revised and rolled back the effective date of the Noncompete Agreements Amendment Act from April 2 to October 1, 2022. The original version of the law contained a wholesale ban of the use of noncompete agreements. However, that broad prohibition was ultimately scrapped. Instead, the law as enacted bans the use of restrictive covenants with employees who earn less than $150,000 annually in total compensation. For employers seeking to enter into noncompete agreements with highly compensated employees, the employer must provide at least 14-days’ prior written notice of the restriction, together with the notification of certain rights. In addition, the law allows the use of noncompete agreements in long-term incentive agreements and other bonus, equity compensation and other performance-driven incentive arrangements. Finally, the law allows for the use of confidentiality nondisclosure agreements, as well as anti-moonlighting agreements designed to protect against the inevitable disclosure of confidential information, professional ethical conflicts, commitment conflicts for employees of higher educational institutions, and violations of other legal or contractual obligations.
Washington Enacts Silenced No More Law. Effective June 9, 2022, the State of Washington’s Silenced No More Act went into effect. The new law prohibits the use of nondisclosure and non-disparagement provisions in agreements with current, former or prospective employees or contractors who are Washington residents if those provisions prevent the worker from disclosing or discussing: (a) conduct they reasonably believe to be unlawful (such as unlawful discrimination, harassment and retaliation); (b) conduct that is recognized as contrary to a clear mandate of public policy; or (c) the existence of a settlement involving any of the above conduct. Importantly, the new law is retroactive. Employers who either enter into a new such agreement or seek to enforce an old agreement with offending provisions will be subject to a minimum damages award of $10,000, plus attorneys’ fees and costs.
States Restrict Use of Noncompetes for Certain Healthcare Workers. In 2022, three states (Iowa, Illinois and Kentucky) enacted laws limiting the circumstances under which temporary staffing and placement agencies can impose noncompete restrictions on healthcare workers. Iowa’s new law prohibits healthcare employment agencies (agencies that contract with health care entities to provide workers for temporary, temporary-to-hire, direct hire or other placement) from including a noncompete clause in any contract with an agency worker or health care entity. Iowa Code § 135Q.1. Illinois’s new law prohibits nursing agencies from entering into noncompetition agreements with nurses or nurse aides and declares any such agreements entered into after the law’s effective date as null and void. 225 ILCS § 510/14. Finally, Kentucky’s new law prohibits healthcare services agencies from entering into noncompete agreements with any direct care staff that is contracted with or employed by the agency and declares any such agreements entered into after the law’s effective date as null and void. KRS Ch. 216.724.
Department of Justice Secures First Guilty Plea in No-Poach Case. In October 2022, the Department of Justice obtained its first anti-trust, no-poaching conviction in the labor market context. In that case, VDA OC LLC (VDA) pled guilty for entering into a conspiracy with a competitor health care staffing firm to allocate employee nurses and fix their wages in relation to the provision of contract nursing services to the Clark County, Nevada school district. VDA was ordered to pay a criminal fine of $62,000 and restitution of $72,000 to the victim nurses. According to the grand jury indictment, VDA allegedly entered into an agreement with its competitor not to hire each other’s nurses and to forego any wage raises for their respective nurse employees.
Fifth Circuit Rules that Noncompete Entered Into Before Commencement of Employment Relationship is Unenforceable under Louisiana Law. In March 2022, the United States Court of Appeals for the Fifth Circuit affirmed a Louisiana federal district court’s decision holding that a noncompete entered into before an employee was hired was not enforceable. In that case, a candidate for an executive position with Rouses Enterprises signed the company’s standard noncompete agreement during his hiring process, but about one month before his first day of employment. The court noted that because Louisiana’s restrictive noncompete statute provides that noncompete agreements may only be lawfully entered into between “persons in employee-employer relationships,” and because the noncompete at issue before the court was not such an agreement, the agreement was not enforceable.
Delaware Chancery Court Refuses to Enforce Noncompetition Agreement Entered into as Part of a Sale of Business Transaction. In October 2022, the Delaware Court of Chancery issued what some found to be a surprising decision in Kodiak Building Partners, LLC v. Adams, C.A. No. 2022-0311-MTZ (Del. Ch. 2022). In that case, the court struck down and refused to blue pencil a 30-month noncompetition restriction in the context of a sale of business transaction. Specifically, after entering into a stock purchase agreement to acquire a roof truss company, the buyer required the employee shareholders to enter into an agreement which prohibited them from, among other things, working in competition with any business of the buyer within 100 miles of any such business for a period of 30 months. The court found the provision unreasonably overbroad to the extent the buyer operated at least 19 wholly owned subsidiaries throughout the country which operated businesses wholly unrelated to the roof truss business, including gypsum products, construction supply products, and kitchen interiors businesses. The court refused to honor the parties’ contractual agreement that the restrictions were per se reasonable and refused to blue pencil the agreement on grounds that doing so would create a perverse incentive for employers to enter into wholly overbroad noncompete restrictions.
FTC Indicates Intention to Restrict Use of Noncompete Agreements with Gig Workers. In September 2022, the Federal Trade Commission adopted a new policy statement to prioritize the protection of gig economy workers, whom the FTC has found to be particularly vulnerable to unfair dealings. Among other things, the FTC committed to ensuring that companies do not require gig workers to enter into overbroad noncompete agreements, and to probe evidence of unlawful no-poach agreements between gig worker employers.
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