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.

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.

Employers Under the Microscope: Is Change on the Horizon?

When: Tuesday, October 18, 2016 8:00 a.m. – 4:00 p.m.

Where: New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Latest Developments from the NLRB
  • Attracting and Retaining a Diverse Workforce
  • ADA Website Compliance
  • Trade Secrets and Non-Competes
  • Managing and Administering Leave Policies
  • New Overtime Rules
  • Workplace Violence and Active-Shooter Situations
  • Recordings in the Workplace
  • Instilling Corporate Ethics

This year, we welcome Marc Freedman and Jim Plunkett from the U.S. Chamber of Commerce. Marc and Jim will speak at the first plenary session on the latest developments in Washington, D.C., that impact employers nationwide.

We are also excited to have Dr. David Weil, Administrator of the U.S. Department of Labor’s Wage and Hour Division, serve as the guest speaker at the second plenary session. David will discuss the areas on which the Wage and Hour Division is focusing, including the new overtime rules.

In addition to workshop sessions led by attorneys at Epstein Becker Green – including some contributors to this blog! – we are also looking forward to hearing from our keynote speaker, Former New York City Police Commissioner William J. Bratton.

View the full briefing agenda here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions. Seating is limited.

If you are an employer with employees in New York (or elsewhere) who have signed an agreement containing a Florida choice of law clause and non-compete and/or non-solicit restrictive covenants, it may be time to revise your agreement.

We blogged last year regarding a decision of the New York Appellate Division, Fourth Department in Brown & Brown, Inc. v. Johnson, holding that a Florida choice of law provision in an employment agreement among a Florida corporation, its New York subsidiary, and a New York based and resident employee containing restrictive covenants is unenforceable because certain elements of the Florida restrictive covenant statute are contrary to New York public policy.

Last month, upon the appeal of that decision, the New York Court of Appeals agreed and held that “applying Florida law on restrictive covenants related to the non-solicitation of customers by a former employee would violate the public policy of [New York].”  New York courts are generally favorable to enforcing choice of law clauses, unless the chosen law violates a fundamental public policy of the state.  Here, the relevant public policy of New York is that restrictive covenants will only be enforced if they are (1) no greater than required for the protection of the legitimate interest of the employer, (2) not unduly hard on the employee, and (3) not injurious to the public.  In contrast, the Florida restrictive covenant statute explicitly prohibits courts from considering the harm or hardship to the former employee, after the employer has demonstrated the covenant protects its business interests.  The Florida statute also — unlike New York — requires courts to construe restrictive covenants in favor of protecting the employer’s interests and bars narrow interpretations of such covenants.

The Court of Appeals thus held that the employment agreement’s choice of law provision was unenforceable in relation to the non-solicit provision, and proceeded to apply New York law in its examination of that provision and the relevant facts.

With New York’s highest court having now spoken, New York employers with employees who have Florida choice of law provisions in their employment agreements should undertake a review of such agreements to confirm that any restrictive covenants comply with New York law.  Employers in other states which like New York disfavor restrictive covenants and look to protect or at least balance the interests of the employee should also re-examine their covenants if they have chosen Florida law to govern.  Revisions may be necessary to improve the chances of enforcing the restrictive covenants going forward.

As a follow up to our prior post on the trials and tribulations of former Goldman Sachs programmer Sergey Aleynikov, once again he obtained a judicial ruling that overturned a conviction following a jury trial.  In a 72-page opinion the trial court, Justice Daniel Conviser, concluded that there was insufficient evidence to support the jury’s conclusion that Mr. Aleynikov had violated New York’s unlawful use of secret scientific material statute.  N.Y. Penal Law § 165.07.

Much like the Second Circuit found in 2012 when it reversed his federal conviction under the National Stolen Property Act and the Economic Espionage Act of 1996, the New York State Justice determined that the prosecutors had not submitted any evidence that the source code downloaded by Mr. Aleynikov “could be touched” or had “physical form” which would be necessary to meet the nearly 50-year old statute’s requirement that the reproduction be in “physical form” and that he had made a “tangible reproduction or representation” of the secret scientific material he downloaded.  The Court also found that the prosecution did not demonstrate that he had the “intent to appropriate . . . the use of secret scientific material.”

As Congress subsequently amended the Economic Espionage Act of 1996, to address the value of the trade secret issues and enacted the Theft of Trade Secrets Clarification Act of 2012, so must the New York Legislature act to modernize the Penal Law to encompass the downloading of electronic data to address the “tangible” reproduction and intent issues.  The New York Senate acted two weeks ago in that regard, now it is up to the Assembly and the Governor to act on it.

A bill has been introduced in the New York State Legislature, aiming to clarify the laws of non-compete and non-solicit agreements in New York.

Introduced by Assemblyman Phil Steck on January 15, 2015 and by State Senator Andrew Lanza on March 20, 2015, the bill (A2147/S4447) is entitled “Policy Against Restraint of Trade,” and operates from the premise that the Court of Appeals decision in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999) has led to confusion in the law of non-competes, particularly in the application of a balancing test in which an employer’s interest in enforcing a non-compete or non-solicit covenant is weighed against the employee’s interest in earning a livelihood.

Among other things, if enacted, the bill could render non-competes and non-solicit agreements in New York unenforceable unless they are reasonable in time and/or geographic scope, and only if the employee or independent contractor:

(1) left the business voluntarily and is unique (i.e., possesses trade secrets of the business or confidential information akin to a trade secret);

(2) is the seller of any portion of the business; or

(3) is a “learned professional” other than a lawyer.

The bill currently sits in the Committee on Labor in both chambers of the legislature, and so is a long way from being enacted.  We will monitor and report on any further legislative progress of the bill.

When recruiting an executive, or when being recruited, it is best practice for the future employer, the employee and any executive recruiting firm involved in the placement to address head-on the existence of any restrictive covenant limiting the future activities of the employee. The New York State Supreme Court – First Department Appellate Division – yesterday upheld a claim that by not clearly disclosing the existence of a non-solicitation restriction in an executive recruit’s employment agreement, the head hunter involved in the placement could potentially be held liable to the new employer for negligent and/or fraudulent misrepresentation. See Amsterdam Hospitality Group v. Marshall-Alan Associates, Index Number 113685/11 (1st Dep’t Aug. 28, 2014).

Knowing what restrictions are in a recruit’s agreement and obtaining sound legal advice about the enforceability thereof enables all the parties involved in the recruiting process to assess, mitigate and avoid the risks attendant to hiring individuals subject to non-compete or other restrictive covenant provisions. Failing to ask or disclose, on the other hand, can potentially expose everyone involved to claims of breach of contract, tortious interference or worse yet, fraud. “Don’t ask, don’t tell” can be a dangerous policy when recruiting executives with employment agreements containing restrictive covenants.

The New York Appellate Division, Fourth Department, recently held in Brown & Brown v. Johnson, 1109 CA 13-00340 (February 6, 2014) that a Florida choice-of-law provision in an employment agreement among a Florida corporation, its New York subsidiary and a New York based and resident employee containing restrictive covenants is unenforceable because it is “truly obnoxious” to New York public policy.

Defendant Theresa A. Johnson was hired by plaintiffs, insurance intermediaries, in December 2006 to provide actuarial analysis for plaintiffs. On her first day of work, Johnson was presented with a number of documents to sign, including an Employment Agreement, which contained the three covenants at issue: a non-solicitation covenant, prohibiting solicitation or servicing any client of plaintiffs’ New York offices for two years after termination of Johnson’s employment; a confidentiality covenant, prohibiting disclosure or use of plaintiffs’ confidential information; and a non-inducement covenant, prohibiting Johnson from inducing plaintiffs’ New York employees to leave plaintiffs’ employment for two years after termination of Johnson’s employment. The Agreement also stated that it would be governed by and construed and enforced according to Florida law.

Florida has perhaps the most comprehensive and detailed state statutes concerning restrictive covenants and enforceability. In conducting its analysis in order to vitiate Johnson’s non-solicit of customers restriction, the Court honed in on two specific areas that differ markedly from New York common-law, despite the fact that there are many more harmonious provisions and seemingly similar policy considerations. Since the Florida statute expressly forbids courts from considering the hardship imposed upon an employee in evaluating the reasonableness of the restrictive covenant (Fla. Stat. § 542.335(1)(g)(1)) and also provides that any such covenant must be construed in favor of providing protection to all legitimate business interests of the party seeking enforcement, it was found to be “truly obnoxious” to the policies articulated in BDO Seidman and its progeny under New York law.

If you are an employer and use Florida law as the controlling law in your agreement for employees located outside of Florida (and particularly for those in New York) you may want to reconsider choice of Florida law in light of the holding in Brown & Brown. The two provisions of the Florida law found “truly obnoxious” pervade almost any restrictive covenant analysis. While the Court could have rested its reasoning on the explicit language in Florida that provides you need not consider any undue hardship on the employee in conducting the enforceability analysis, it went further to provide that since Florida law requires courts to construe restrictive covenants in favor of the party seeking to protect its legitimate business interests (Florida Statutes § 542.335(1)(h)), it was especially obnoxious on that basis as well. The latter conclusion affects any restrictive covenant analysis in New York, not only non-competes but also non-solicits, non-service, non-poach or other more specific and narrow restrictions. While one may not agree with the Court’s analysis or conclusion, anyone trying to enforce in New York (and perhaps any state other than Florida) any restrictive covenant controlled by Florida law will have to reckon with the Brown & Brown holding.

A recent decision from the United States District Court for the Southern District of New York, Reed Elsevier Inc. v. Transitions Holding Co., Inc., provides a useful overview of New York law on restrictive covenants. At issue was an employee non-poach agreement between two companies entered as a result of a settlement in the context of the earlier hiring of another senior executive with a non-compete. Not an unusual situation. What is somewhat unique is that the alleged “poaching” occurred in the context of the acquisition of the restricted employee’s company – – not the recruitment of the restricted employee. The Court determined not to enforce the non-hire finding that the plaintiff was unable to demonstrate that it would meet any of the four recognized “legitimate business interests” necessary to overcome the strong presumption of unenforceability of restrictive covenants under New York law.

Although the facts and circumstances presented in this case are rather unique, the Court’s review of the applicable New York case law to obtain enforcement could be quite useful to practitioners in the area. New York courts have recognized four legitimate interests that may be asserted to support a restrictive covenant: (1) protection of trade secrets, (2) protection of confidential customer information, (3) protection of the employer’s client base, and (4) protection against irreparable harm where the employee’s services are unique or extraordinary. Cenveo Corp. v. Diversapack LLC, 09 Civ. 7544(SAS), 2009 WL 3169484, at *7 (S.D.N.Y.2009) (citing BDO Seidman v. Hirshberg, 93 N.Y. 382, 388-89 (1999)).

The Reed Elsevier Court then proceeds to do the analysis under these elements (other than customer information which was not applicable). Regarding (1) protection of trade secrets, the Court noted that the confidentiality restriction in the employee’s agreement served to provide that protection and that an enhanced ability to market a product alone was insufficient to create a protected interest. Element (3), protection of the employer’s client base, required a showing that “the employee must work closely with the client or customer over a long period of time, especially where his services are a significant part of the total transaction.” In order to meet the fourth element, unique or extraordinary employee, the Court observed two sets of circumstances to constitute uniqueness. The first category applies to types of employment where the employee’s services depend on the employee’s special talents; examples include “musicians, professional athletes, actors, and the like.” Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 70 (2d Cir. 1999). The second, more recently recognized category, applies to employees who work as brokers, traders, or salespersons; the courts have found such employees’ services to be unique based on their unique relationship with the customers with whom they deal. Id. at 71; see also Maltby v. Harlow Meyer Savage, Inc., 166 Misc.2d 481, 633 N.Y.S. 926 (Sup.Ct.N.Y.Cnty.1995), aff’d 637 N.Y.S.2d 110 (1st Dep’t 1996); Natsource LLC v. Paribello, 151 F.Supp.2d 465, 469 (S.D.N.Y.2001).

Finally, the Court addressed the argument that risk of employee attrition should be considered a legitimate interest and rejected that concept finding that at least federal courts applying New York law have consistently determined that the four factors alone create the exclusive list to be considered.

While one might not agree with the Court’s application of the facts to the law, its recitation of the applicable law serves as a good guidepost for any restrictive covenant analysis under New York law.

There are three important “take-aways” from New York Supreme Court Justice Charles E. Ramos’ recent decision in Greystone Funding Corporation v. Kutner: (1) termination “without cause” is not a per se prohibition of enforcement of a non-compete unless the language of the contract as in this case so provides; (2) conclusory allegations of breach of fiduciary duty, tortious interference and unfair competition are inadequate and will be dismissed unless supported by facts on each element of proof; and (3) customer and prospect identity and impressions about them are sufficiently sensitive to warrant cause for sealing of a record under 22 NYCRR § 216.1.

Kutner was a senior mortgage originator for Greystone and had a two-year non-compete provision in his employment agreement. That restriction, however, by its explicit terms expired immediately if Greystone terminated Kutner “without cause” rather than two years hence. Justice Ramos thus dismissed the breach of contract action relying on the terms of the agreement itself and not on any “per se” application of unenforceability. While some believe such a doctrine exists in New York, I have written previously why I believe it does not. See After Termination “Without Cause:” Restrictive Covenants, NYLJ February 8, 2007.

Despite the fact that the Complaint alleged that while still employed by Greystone Kutner had recruited co-workers to join him at a competing mortgage lending business and, upon information and belief, he had formed and actively operated a competing business while still employed by Greystone, Justice Ramos held that the Complaint was not plead with sufficient particularity on each element of each cause of action and dismissed the tortious interference, breach of fiduciary duty, unfair competition and related claims. To my knowledge, it is one of the first New York State court decisions to put plaintiffs to a Twombly and Iqbal standard of pleading in a non-compete case.

Finally, trade secret cases always present the conundrum of pleading with sufficient specificity yet not disclosing actual trade secret and proprietary information so as to lose the protections afforded to such information. Justice Ramos properly found “good cause” as required by 22 NYCRR § 216.1 where the information “contained impressions and contemporaneous notes that could harm Greystone’s competitive advantage by having access to a large compilation of their business leads and their internal and contemporaneous impressions.” Relying on Mancheski v. Gabelli Group Capital Partners, 39 A.D.3d 499, 503 (2d Dept 2007) (argued by this author!), Justice Ramos granted the motion to seal portions of the record in this action.