Nevada employers be advised: on June 3, 2017, Governor Brian Sandoval signed into law Assembly Bill 276, which amends Chapter 613 of the Nevada Revised Statutes and sets forth a new framework in which noncompetes are evaluated. The amended law includes the following four changes:

  1. A noncompete is void and unenforceable unless the noncompete:
    1. Is supported by valuable consideration;
    2. Does not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed;
    3. Does not impose any undue hardship on the employee; and
    4. Imposes restrictions that are appropriate in relation to the valuable consideration supporting the noncompete.
  2. A noncompete may not restrict a former employee of an employer from providing service to a former customer or client if:
    1. The former employee did not solicit the former customer or client;
    2. The customer or client voluntarily chose to leave and seek services from the former employee; and
    3. The former employee is otherwise complying with the limitations in the noncompete as to time, geographical area and scope of activity to be restrained, other than any limitation on providing services to a former customer or client who seeks the services of the former employee without any contact instigated by the former employee.
  3. When an employee is terminated as the result of a reduction of force, reorganization or similar restructure of the employer, a noncompete is only enforceable during the period in which the employer is paying the employee’s salary, benefits or equivalent compensation (including severance pay).
  4. If an employer brings an action to enforce a noncompete and the court finds that it is supported by valuable consideration but (a) contains limitations as to time, geographical area or scope of activity to be restrained that are not reasonable, (b) imposes a greater restraint than is necessary for the protection of the employer and (c) imposes undue hardship on the employee, then the court must revise or “blue pencil” the noncompete to the extent necessary and enforce it as revised. Such revisions must render the limitations reasonable and no greater than is necessary for the protection of the employer.

Key Takeaways

The legislation does not clarify the meaning of the term “valuable consideration.” Such guidance will likely come from the courts as Nevada employees and employers litigate what is meant by the term, although it appears that an at-will employee’s continued employment in and of itself will not be considered sufficiently “valuable” under the law. In the meantime, without the benefit of legislative or judicial guidance, Nevada employers should assess whether an employee subject to a noncompete has received adequate consideration, particularly in relation to the restriction that is being imposed in the noncompete.

The legislation is also notable in that it reverses a prohibition on judicial blue penciling that was established by the Nevada Supreme Court in a 2016 decision, Golden Road Motor Inn, Inc. d/b/a Atlantis Casino Resort v. Islam and Grand Sierra Resort, 376 P.3d 151 (Nev. 2016). Nevada courts are now required to modify or “blue pencil” overbroad noncompetes to the extent necessary to render them enforceable. Although Nevada employers with an overbroad noncompete can take comfort knowing that the noncompete will not simply be discarded, they should nevertheless revise their noncompetes so that they impose restrictions in terms of time, geographical area and scope of activity that are reasonable.

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.

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.

Matthew Savage Aibel
Matthew Aibel
Anthony J. Laura
Anthony Laura

With remote access technology becoming standard across industries, companies readily engage a multi-state workforce, with many employees residing outside of the employer’s home state.  While an expanded access to talent may be beneficial, one drawback is the ability to enforce restrictive covenants with out of state employees in a consistent manner and in the employer’s home state.  The case of Numeric Analytics, LLC v. McCabe, et al., offers insight into that issue. 2:16-cv-00051-GAM (E.D. Pa. 2/9/16).

Background

Numeric Analytics, a web analytics and marketing consulting company based in Pennsylvania, engaged employees working remotely in various states across the country.  Its President left the company to start a competing business and in the process, recruited four other employees to join her.  All the employees worked remotely in other states and had signed offer letters that included Non-Solicitation Agreements.  Those agreements provided that Pennsylvania law controlled, but lacked any forum-selection provision.  Numeric brought suit in Pennsylvania against its former employees seeking to enforce the Non-Solicitation Agreements and alleging various tort claims as well.

Jurisdiction Analysis

After noting that it did not have general jurisdiction over the non-resident defendants, the court proceeded with a specific jurisdiction analysis.  Numeric alleged that the employees directed their activities to Pennsylvania because they “signed employment contracts with a Pennsylvania company, continuously communicated with a Pennsylvania company about their employment, ran all invoices for the work they performed through Pennsylvania, and were paid by their Pennsylvania employer.” (Id. at 6-7).  Additionally, Numeric presented evidence that the employees needed to contact the Pennsylvania office to resolve payroll, benefits, or other problems throughout the course of their employment; that medical coverage, medical benefits, and retirement plans were administered from Pennsylvania; that each employee’s timekeeping, billing of customers, and email were managed by the Pennsylvania office; and that Numeric paid Defendants’ salaries using a Pennsylvania bank. (Id. at 7).

The court held that all of those factors “are characteristic of a traditional employer-employee relationship, except for location.” (Id.).  The court decided that the claim for breach of the restrictive covenant arose out of and related to the Defendants’ contract, and that exercising specific jurisdiction over them with respect to that claim was fair and reasonable given the circumstances.  The court remarked, however, that the lack of a forum selection clause in the contract made this a much more difficult issue, and that such a clause “would be the preferred method of resolving such ambiguity.” (Id. at 8).  The court declined to exercise specific jurisdiction with respect to all of the tort claims (except for the fiduciary duty and tortious interference claims against the former president), finding that the tortious conduct on those claims was not directed at the forum nor caused sufficient injury in the forum in a manner sufficient to support specific jurisdiction.

Takeaways

As the court sums up: “[I]n a business with its operations and personnel widely distributed across state or even national boundaries, questions of jurisdiction can become significantly more complicated.” (Id. at 2).  One obvious solution to this problem is to have a forum selection clause in all employment agreements, especially those with out-of-state employees.  Such a provision will usually control the analysis and enable a company to seek to enforce the agreements in its preferred locale.   This case should serve as a cautionary tale for employers with remote employees and should remind all legal and human resource departments to check on the contracts they currently have with remote employees to ensure they contain forum selection clauses.

Our colleagues Lauri F. Rasnick and Adriana S. Kosovych, attorneys in the Employment, Labor & Workforce Management practice at Epstein Becker Green, have a post on the Financial Services Employment Law blog that will be of interest to many of our readers: “Implementing and Applying the Employee Choice Doctrine: Employers Focus on Forfeiture to Protect Their Company’s Assets.”

Following is an excerpt:

Employers seeking to protect their competitive advantage and find an alternative method of influencing employees to not compete are increasingly relying on so-called “forfeiture for competition” agreements in place of traditional non-competes. This trend is driven, in large part, by the “employee choice” doctrine. In states that have adopted the employee choice doctrine, such as New York, a post-employment non-compete will not be subject to the usual reasonableness standard when it is contingent upon an employee’s choice between receiving and retaining a benefit (e.g., restricted stock, stock options, or some other deferred compensation) and competing.

Read the full post here.