Non-Compete Agreements

In 2016, several states enacted laws that were designed, in varying degrees, to limit non-competes, including Illinois, Utah, Connecticut and Rhode Island. Which states are most likely to do the same in 2017?

Idaho:  A bill proposed in January, House Bill 61, would amend an existing Idaho law that has made it easier for employers to enforce non-competes against the highest paid 5% of their employees and independent contractors.  The bill would alleviate the burden placed on such “key” personnel by the existing law by, among other things, eliminating the rebuttable presumption of irreparable harm to the employer that is automatically established if a court finds that the key employee or independent contractor is in breach of his or her non-compete.

Maryland:  On January 27, 2017, Maryland lawmakers proposed House Bill 506, which would render null and void any non-compete provision in an employment contract that restricts the ability of an employee who earns equal to or less than $15.00 per hour or $31,200 annually to enter into employment with a new employer or to become self-employed in the same or similar business. The bill was adopted by Maryland’s House and is now in its Senate.

Massachusetts:  On January 20, 2017, lawmakers proposed Bill SD.1578, which would impose significant limitations on the reach of non-competes in Massachusetts.  If enacted, the proposed law would, among other things:  limit the temporal scope of non-compete agreements to 12 months from the date of termination of employment (or 2 years if the employee has breached his or her fiduciary duty or has unlawfully taken property belonging to the employer); prohibit non-competes against certain categories of workers, including nonexempt employees, students, employees terminated without cause, and employees 18 years or younger; and require non-competes to be supported by consideration independent from the continuation of employment.

Nevada:  A bill proposed in February, A.B. 149, would make a non-compete “void and unenforceable” in Nevada if it prohibits an employee from seeking employment with or becoming employed by a competitor for a period of more than 3 months after the employee’s termination, which is an extremely short duration in the non-compete realm.  Willful violators of the law would be guilty of a gross misdemeanor punishable by a fine of not more than $5,000; in addition, the Nevada Labor Commissioner may impose an administrative penalty of up to $5,000 for each such violation.

New York:  On October 25, 2016, New York Attorney General Eric Schneiderman announced that he planned to introduce legislation in 2017 that would, among other things, prohibit the use of non-competes for low-wage workers and require employers to pay employees additional consideration if they sign non-compete agreements.  While he has not yet introduced this bill, Schneiderman has given no indication that he will backtrack from his 2016 announcement.

Washington:  After a bill that would have, among other things, limited non-competes to one year faced strident opposition from businesses, Washington legislators penned a more watered-down version of a bill designed to make non-compete agreements more transparent.  Specifically, Bill HB 1967, which passed the Washington House on March 8 and is now in the Senate, requires that all the terms of a non-compete contract be disclosed in writing before the employee signs the contract. While this revised bill is far less restrictive than other proposed bills, if enacted, it will nevertheless be beneficial to Washington employees.

Stay Tuned: The Maryland and Washington bills have the most traction, as they have already passed the states’ Houses.  Nevertheless, at this point it is simply too early to predict whether the law proposed in those states or elsewhere will garner enough support to clear the necessary legislative and executive hurdles to be enacted.  In the meantime, employers across all states should stay tuned and continue to draft narrowly tailored and enforceable non-competes.

In non-compete matters, it is often said that trial judges dislike enjoining individuals and will go out of their way to avoid doing so. A recent decision by the Florida Court of Appeals, Allied Universal Corporation v. Jeffrey B. Given, may be a good example of such a situation – as well as an example of an employer that took an immediate appeal and got the relief it wanted.

In Allied Universal, the trial court denied a motion for a preliminary injunction to enforce the terms of a non-compete with a former employee, even though the employee failed to rebut evidence that his non-compete was supported by legitimate business interests and that his former employer would suffer irreparable harm in the absence of an injunction.  Here, the legitimate business interests at issue were substantial relationships with specific prospective or existing customers and various types of proprietary information and pricing strategies.

Rather than presenting rebuttal evidence, the employee argued that because he had not yet begun to actively compete, he had not yet breached his non-compete.  Following an evidentiary hearing, the trial court denied the motion for a preliminary injunction, “finding only that Allied failed to show irreparable harm or absence of an adequate remedy at law.”

In contrast, based on the unrebutted evidentiary record, the appellate court held that the burden shifted to the employee to establish the absence of irreparable harm, and that because the employee failed to provide such evidence, the trial court’s denial of an injunction was an abuse of discretion.

While it is impossible to say what degree human empathy played in the trial court’s denial of the preliminary injunction, prudent practitioners in non-compete cases should never lose sight of that reality. They should also not forget that denials of requests for injunctive relief are immediately appealable, and if a request is justified under the facts and the law, an immediate appeal may be in order.

Matthew Savage Aibel

In Acclaim Systems, Inc. v. Infosys, the U.S. Court of Appeals for the Third Circuit recently rejected a claim for tortious interference with a non-compete, because the plaintiff introduced no evidence of actual knowledge that the individuals in question were covered by non-competes.

Infosys, an IT services company, bid on a job from Time Warner Cable (“TWC”) that had been serviced by a competitor, Acclaim. TWC decided to transfer the project over to Infosys, but wanted Infosys to hire four contractors who previously worked with Acclaim on the project.

Infosys acceded to TWC’s request, but first reached out to the contractors to inquire about any possible non-competes in their contracts with Acclaim. One contractor affirmatively stated in an email, “I do not have a non-compete clause with Acclaim.”  That same contractor also represented on an employment application that he did not have any contractual restrictions, including non-compete covenants.  The other three contractors verbally represented that they were not subject to any non-compete agreements, and their subcontractor employer, when asked, also did not inform Infosys of any non-compete.  In fact, all four contractors had non-competes in their contracts with Acclaim.

Acclaim filed suit against Infosys for tortious interference with these non-competes (i.e., intentional interference with contract).  The District Court granted summary judgment to Infosys.

The Court of Appeals found that to have “intent” to harm a contractual relationship, a party must have knowledge of that relationship. Here, the Court found that Infosys did not have knowledge of the non-competes, so it could not have had the intent necessary to commit tortious interference.  Acclaim argued, based on circumstantial evidence and the industry custom of non-competes in IT services, that the existence of the non-competes could be inferred.  Acclaim also argued that by asking the contractors themselves, Infosys did not ask the correct parties and instead should have asked the subcontracting employers.  Acclaim alleged that Infosys conducted a “sham” due diligence process such that it was willfully blind to the existence of the non-competes.

The Court of Appeals found that by asking multiple times about the non-competes, Infosys could not be held to be “willfully blind,” and further found that Acclaim’s arguments regarding asking questions to the wrong party were an improper attempt to imposed a negligence standard of care on an intentional tort.

This case shows that when onboarding employees, companies should exercise due diligence in ascertaining the existence of a possible non-compete. Steps that can be taken as part of such due diligence include having counsel review any existing contracts to which a potential new hire is subject and having potential hires and contractors sign certifications regarding the existence of non-competes or other contractual restrictions on their ability to perform the duties of their proposed new position.

The year-end episode of Employment Law This Week  looks back at the biggest employment, workforce, and management issues in 2016.

Our colleague Jonathan Shapiro discusses the impact of the Defend Trade Secrets Act (DTSA)—which opened federal courts to trade secrets claims, regardless of the dollar value—and the White House’s call to action encouraging states to ban non-compete agreements in some circumstances.

Watch the segment below and read Epstein Becker Green’s recent Take 5 newsletter, “Top Five Employment, Labor & Workforce Management Issues of 2016.”

LightsWhether you are a young child missing teeth, or a grown-up taking account of her life, or Santa Claus himself checking up on everyone else’s life, many of us make lists at holiday time.  They can be lists of gifts we want, or those we need to get, or people we wish to see or write to, or things we need or want to do before the end of the year.  Sometimes they are just lists of things that happened this year or that we want to happen next year.  Certainly there are lots of “Top Ten” holiday lists.  This one may be neither an exception nor exceptional, but here is a “Top Ten List of Holiday-Related Trade Secret/Non-Compete Cases”:

  1. “It may be better to be naughty than nice”—In Ivy Mar Co., Inc. v. CR Seasons Ltd., 907 F. Supp. 547 (EDNY 1995), the Court denied plaintiff a preliminary injunction in a non-compete/trade secret case in large part because of plaintiff’s months-long delay in bringing the action. This occurred notwithstanding plaintiff’s claim that it only delayed filing the action so as not to ruin Christmas—“they delayed bringing this motion because they feared defendant Jetmax would not ship goods to its customers during the Christmas season,” or so they claimed.
  2. “Or maybe not.”—In Agero Inc. v. Rubin et al., an appellate court in Massachusetts affirmed dismissal of plaintiff’s claims, holding that Agero failed to establish that two of the defendants, Timothy Schneider and Matthew Capozzi, owed Agero a duty of loyalty.  Though the Court when on at some length as to the reasons it had for affirming the result against Agero, what was perhaps most telling was the Court’s taking the time to express a reason that it was not relying on:
    • We need not comment on the defendants’ suggestion that Agero brought this complaint against them, despite Agero’s size and apparent lack of interest in pursuing ViewPoint, to send a message to other Agero employees who might entertain thoughts of leaving and lawfully competing. That Agero reportedly sued Schneider on Christmas Eve, when Schneider’s oldest child was five years old, might lend credence to the charge. However, we do reiterate that noncompetition agreements would be the better practice to achieve that goal. Based on the record before us, Agero’s claims were properly dismissed.
  3. “Check your list twice”—If you think departing employees had accomplices or other help, don’t just add a bunch of John Does to your complaint without defining and describing who those co-conspirators are.  Otherwise you run the risk of having those claims dismissed and those avenues of discovery shut down in your non-compete or trade secret case just as happens in other types of cases, such as Southwest Materials Handling Co. v. Nissan Motor Co., 2000 U.S. Dist. LEXIS 16275 (N.D. Tex. 2000), where the court said, with respect to civil conspiracy allegations against John Doe defendants, that “[t]his Court is not in the position of channeling or divining potential co-conspirators who are presently as tangible as Santa Claus, the Easter [B]unny or the Tooth Fairy.”  I guess the court did not find the testimony of Frank Church credible.
  4. “What is the secret to making a good snowman?”—Though there is now a patent on for an apparatus for facilitating the construction of a snow man/woman out of snow, making snowman holiday decorations has also spawned litigation like the case of  Gemmy Industries Corporation v. Chrisha Creations Limited, Dist. Court, SD New York 2004. In Gemmy, plaintiff claimed that defendant’s marketing of an inflatable snow man, among other causes of action, violated plaintiff’s trade secrets, especially after defendant hired plaintiff’s former sales representative.  But the court concluded that even plaintiff did not treat the snowman and its marketing as involving trade secrets since plaintiff “did not request and [the sales representative] did not execute any non-disclosure agreement, non-compete agreement or confidentiality agreement prior to acting as a sales representative for [plaintiff].”
  5. “‘It was always said of him, that he knew how to keep Christmas well, if any man alive possessed the knowledge.’”—Dickens’ closing words in A Christmas Carol were a celebration of the Christmas spirit, and sharing but not everyone wants to share the knowledge they have about Christmas traditions.  While some have asked, we think tongue in cheek, whether Christmas may be patented, it does appear that at least some aspects of our Christmas traditions can be protected as trade secrets.  In the case of IPI, INC. v. Monaghan, 2008 Ohio 975 (Court of Appeals, 6th Appellate Dist. 2008), an Ohio Court found that plaintiff had stated a claim for relief, and could proceed to trial, on a claim that plaintiff’s unique methods of “‘event’ photography” such as involved in its “Santa Claus programs” could involve protectable trade secrets under the Ohio Trade Secrets Act, where plaintiff had alleged that “it developed, inter alia, ‘confidential and specialized techniques for event photography, a business marketing plan for its franchisees, a training program, and proprietary and confidential software that it makes available to its franchise systems’” and that “appellees/cross-appellants misappropriated these systems, techniques, etc., that is, its alleged trade secrets. If it is shown that these are truly trade secrets and that appellees/cross-appellants misappropriated the same, IPI would be directly injured by that misappropriation.”
    • Not all courts, however, are willing to give litigants credit for the alleged uniqueness of their holiday-related ideas. This can be seen in Oxenhandler v. Dime Sav. Bank of Brooklyn, 33 Misc. 2d 626 (NY Supreme Court 1962), where plaintiff was denied relief in his trade secret/business information claims against the financial institution to which he had suggested “a ‘Chanukah Savings Plan’ which could be made available to [the bank’s] Jewish depositors in the same manner that a Christmas Club had been available to the general public.”  In fact, the Court concluded that “plaintiff’s idea was neither new, novel, original nor concrete,” and that the Court “cannot perceive how plaintiff on any theory in law can succeed in this action.”  New settings for Christmas Savings Clubs faired no better as alleged trade secrets or protectable ideas either, as seen in Moore v. Ford Motor Co., 43 F. 2d 685 (2nd Cir. 1930). There, plaintiff Moore sought to protect the idea of Christmas Club accounts as a way to save for down payments on automobiles.  The Court concluded that there was nothing secret or unique about such a plan, and that “idea was old in Christmas Savings clubs” for some time.
  6. Beware the office Christmas party.”—Normally this is a phrase you see in HR guides, but it can also hold true in the non-compete area of the law as seen in Plastic Surgery Associates Of Kingsport Inc. v. Pastrick, a 2015 decision of the Tennessee Court Of Appeals 2015. In this case, the court held that the defendant was indeed an employee and an owner of the plaintiff medical practice, and subject to the express terms of his employment agreement (including its non-compete provisions) and liable as an owner for a portion of the practice’s debts.  The court rested its conclusions of ownership on three key facts, one of which was that defendant “hosted a Christmas party at his home that was billed to the company.”  Unless that party was epic, it probably would have been cheaper to pay for the punch and appetizers out of his own pocket.  It would have eliminated that troublesome fact and helped him avoid the necessity of disgorging $246,633.00.
  7. Christmas cards, why bother?”—In Vizant Technologies, LLC v. Whitchurch, 97 F. Supp. 3d 618 (ED Pa. 2015), plaintiff brought a ten-count complaint against defendant alleging misappropriation of trade secrets in violation of the Delaware Uniform Trade Secrets Act (“DUTSA”) as well as two violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), breach of contract, defamation, tortious interference with existing and prospective relationships, abuse of process, conversion, fraud, and civil conspiracy. Finding that defendant was using confidential information and otherwise acting tortiously in contacting plaintiff’s (i.e. her former employer’s) employees, officers, and directors, and with their family members, and in interfering with plaintiff’s business with customers.  This resulted in Whitchurch’s being enjoined from carrying through on her stated “intention to send a ‘Christmas card direct mail piece’” out further criticizing Vizant and its principals to that same audience.
  8. New Year’s resolutions should be thought out.”—Many times, employees will decide to leave for new employment after the upcoming holidays pass.  So it was in Alexander & Alexander v. Wohlman, 578 P. 2d 530 (Wash: Court of Appeals, 1st Div. 1978), where “[b]etween Christmas 1975 and New Year’s Day 1976, the defendants decided to leave the employment of A&A.”   The problem was not their resolve to leave, but the things that they did before they left:
    • On Friday afternoon, January 16, 1976, after Mr. Maier, the manager of the Seattle office, had left for the weekend, they submitted their letters of resignation and took with them personal possessions and certain schedule books for use as forms in the conduct of their business. Between January 12 and 16, 1976, each of the defendants personally contacted clients of theirs to inform them of their decision to leave A&A and the formation of the new firm, Wohlman & Sargent, Inc. On January 17 and 19 defendants sent letters to clients requesting broker-of-record letters.
    • The appeals court found that such conduct did violate their legal obligations to A&A, and found them liable for damages.
  9. Sometimes you get coal in your stocking.”—Courts often work through the holidays, despite the general impression to the contrary. For instance, in Direx Israel, Ltd. v. Breakthrough Medical Corp., 952 F. 2d 802 (4th Cir. 1991), plaintiff obtained a preliminary injunction from the District Court against the defendant who, when he was discharged, illegally appropriated and exploited the plaintiffs’ trade secrets, and were using such trade secrets to manufacture, with intent to market, a machine competitive with the plaintiffs’ product.  The 4th Circuit reversed the grant of the preliminary injunction, but did so “without prejudice to the right of the plaintiffs to renew such motion on the basis of any new or additional facts that may have occurred since the grant under review.”  The appellate court’s decision issued on December 24th.  Likewise, in Viad Corp. v. Cordial, 299 F. Supp. 2d 466 (WD Pa. 2003), the Court issued a Christmas Eve denial of a preliminary injunction request in case in which Defendants Cordial and Hellberg were alleged to have violated their employment contracts, which prohibited them from competing with plaintiff directly or indirectly, or aiding its competitors, for a period of one year following the termination of their employment, though in the holiday spirit the Court pointed out that plaintiff and defendants had been “represented by counsel who tried the matter skillfully and efficiently.”
  10. Sometimes, though, you get what you asked for.”—In Devos Ltd. v. Record, Dist. Court, ED New York 2015, on the other hand, the court issued on Christmas Eve a wide ranging injunction against defendants in a trade secret misappropriation and unfair competition case even though the plaintiff had been indicted and had been placed on a federal exclusion list that meant that no federal agency can do business with plaintiff and that any pharmaceutical distributor who receives federal funding, including Medicare and Medicaid (which includes almost every distributor of pharmaceuticals), also cannot do business with plaintiff. Concluding that an indictment was just an accusation of being naughty rather than a finding of same, the court issued the injunction.  There was no mention of where Santa had come out when double checking Devos’ placement on his list.

Happy holidays.

The top story on Employment Law This Week:  The White House is calling on states to combat what it describes as the “gross overuse of non-compete clauses today.”

The call to action recommends legislation banning non-competes for certain categories of workers and prohibiting courts from narrowing overly broad agreements. New York Attorney General Eric Schneiderman answered the call immediately, announcing that he would introduce relevant legislation in 2017. Our colleague Zachary Jackson, from Epstein Becker Green, comments.

Watch the segment below and see our blog post on this topic.

The top story on Employment Law This Week: The DOJ intends to investigate anti-competitive trade practices.

The Department of Justice and the Federal Trade Commission released joint guidance for HR professionals on how antitrust laws apply to employment. The guidance explains that agreements among employers not to recruit certain employees—or not to compete on terms of compensation—are illegal. Notably, the DOJ announced that they plan to criminally investigate “naked no-poaching or wage fixing agreements” that are unrelated to legitimate collaboration between businesses. In the past, both agencies have pursued civil enforcement. Peter Altieri, co-editor of this blog and a Member of the Firm at Epstein Becker Green, is interviewed.

Watch the segment below and read our previous post on this topic.

Political winds disfavoring non-compete agreements for low wage and rank-and-file workers continue to blow, and appear to be picking up speed.

On October 25, 2016, the White House took the unusual step of issuing a “Call to Action” to states regarding non-compete agreements, as part of the President’s initiative to stoke competition across the economy.  Calling non-competes an “institutional factor that has the potential to hold back wages and entrepreneurship,” the Call to Action seeks to reduce the misuse of non-compete agreements nationwide.

President Obama called on state policymakers to join in pursuing best-practice policy objectives, including:

  1. Banning non-compete clauses for categories of workers (such as low wage workers or workers laid off or terminated without cause);
  2. Improving transparency and fairness of non-compete agreements; and
  3. Incentivizing employers to write enforceable contracts (i.e., discouraging overreaching provisions) by, for example, promoting the “red pencil doctrine” which renders contracts with unenforceable provisions void in their entirety.

Immediately answering the White House’s Call to Action, New York Attorney General Eric T. Schneiderman announced on October 25, 2016 that he would introduce legislation in New York’s state legislature in 2017 “to curb the rampant misuse of non-compete agreements, which depress wages and limit economic mobility.”

Among other things, the proposed New York bill would prohibit the use of non-competes for any employee below the salary threshold set by Labor Law Section 190(7) (currently $900 per week); would require non-competes to be provided to individuals before a job offer is extended; and would require employers to pay employees additional consideration if they sign non-competes.

Employers thus should review their non-competes to ensure that they are narrowly drafted and should re-evaluate the categories of employees asked to sign them, so as to confirm that only those who truly pose a competitive threat are asked to sign a non-compete.

Also, the Call to Action falls in line with Guidelines recently issued by the Department of Justice and Federal Trade Commission, which outline an aggressive policy to investigate and punish employers and individual human resources employees who enter into unlawful agreements concerning employee recruitment or retention.

Following up on a string of civil enforcement actions and employee antitrust suits, regarding no-poaching agreements in the technology industry, on October 20, 2016 the Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”) issued Antitrust Guidance for Human Resources Professionals (the “Guidance”). The Guidance outlines an aggressive policy to investigate and punish employers, and individual human resources employees who enter into unlawful agreements concerning employee recruitment or retention.

The Guidance focuses on three types of antitrust violations:

  • Wage fixing agreements: agreements among employers to fix employee compensation or other terms or conditions of employment at either a specific level or within a range;
  • No poaching agreements: certain agreements among employers not to solicit or hire one another’s employees not ancillary to an overarching pro-competitive collaboration; and
  • Unlawful information exchanges: exchanges of competitively sensitive information which facilitate wage matching among market participants.

“Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws. That means that if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects.” The Guidance goes on to warn that “going forward, the DOJ intends to proceed criminally against naked wage fixing or no poaching agreements. These types of agreements eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers, which have traditionally been investigated and prosecuted as hardcore cartel conduct.”

“Even if an individual does not agree explicitly to fix compensation or other terms of employment, exchanging competitively sensitive information could serve as evidence of an implicit illegal agreement.” Information sharing agreements which have anticompetitive effects are subject to civil antitrust liability, including treble damages (a monetary penalty of three times the amount of the actual damages suffered). The FTC has taken the position that “merely inviting a competitor to enter into an illegal agreement may be an antitrust violation—even if the invitation does not result in an agreement to fix wages or otherwise limit competition.”

Antitrust Red Flags

In addition to the Guidance, the FTC and DOJ issued a list of Antitrust Red Flags for Employment Practices that human resources professionals should look out for in the employment setting. Red flags include:

  • Agreements with another company about employee salary or other terms of compensation either at a specific level or within a range;
  • Agreements with another company to refuse to solicit or hire that other company’s employees;
  • Agreements with another company about employee benefits;
  • Agreements with another company on other terms of employment;
  • Expressing to competitors that they should not compete too aggressively for employees;
  • Exchanging company-specific information about employee compensation or terms of employment with another company;
  • Participating in a meeting, including a trade association meeting, where the above topics are discussed;
  • Discussing the above topics with colleagues at other companies, including during social events or in other non-professional settings; and
  • Receiving documents that contain another company’s internal data about employee compensation or benefits.

The above conduct is not necessarily unlawful in all circumstances. However, best practice is to consult counsel prior to engaging in this conduct to avoid antitrust law violations and if possible, restructure the agreement or information exchange to accomplish its intended legal purpose.

Featured on Employment Law This Week: An employer cannot waive its own non-compete agreement to avoid payment, unless the agreement specifically grants it the right to do so.

An employee of a financial services firm in Illinois signed an agreement that required a six-month post-employment non-competition period in exchange for $1 million from his employer. When the worker resigned, the employer sent a notice waiving the agreement and telling the employee that it would not pay him the $1 million. After waiting out the six months, the employee filed suit against his former employer. The Illinois Court of Appeals found that there was no provision in the agreement that allowed the employer to change the terms without consent from the worker, and because the employee upheld his end of the contract, the employer must pay him what is due.

Watch the segment below and see our previous post on this topic.