Restrictive Covenants in a Multistate Business Labor & - - PowerPoint PPT Presentation

39 Offices in 19 Countries

Restrictive Covenants in a Multistate Business

Labor & Employment Educational Webinar Series

Susan M. DiMickele, Partner & Co- Head Employment Labor & Employment Susan.DiMickele@squiresanders.com +1.614.365.2842 +1.212.872.9828 Meghan Hill, Senior Associate Labor & Employment Meghan.Hill@squiresanders.com +1.614.365.2720 +1.212.407.0105

September 11, 2013

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New Developments in Non-Competes

• California – Federal case enforcing forum

selection clause

• Illinois – State court case invalidating at-will

employment as sufficient consideration

• New York – State court case affirming

employee choice doctrine

• Texas – case to watch in 2014 on sufficient

consideration

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Restrictive Covenants: What’s at Stake?

• Your Intellectual Property May Walk Out the Door
• Employee Mobility – Competition

At-will employees change employers freely Common law does not provide adequate protections

• May Affect Your Ability to Hire
• To protect your IP, as a multi-state business you must

understand how the laws of the various states in which you do business view restrictive covenants and generally understand which laws are likely to apply to your agreements

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Legal Framework

• Non-compete Agreement: a contract that seeks to protect

legitimate business interests:

Long-term customer relationships Confidential information/trade secrets

• No federal non-compete law: law of restrictive covenants is

almost completely a state law question.

Law can vary dramatically from state to state

• As a result:

Some US states will enforce restrictive covenants Others essentially do not enforce them at all.

• Employers cannot rely solely on choice of law and/or forum

clauses

Employers must anticipate and consider the laws of each states which

may potentially “touch” the business, the employee, or the agreement at issue.

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Types of Restrictive Covenants

• Non-competition

“no work”

• Non-solicitation

Customers Suppliers Employees

• Non-disclosure: Not talking about this today!

– However, are occasional state variations

» E.g., Georgia and two years

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Choice of Law/Forum Selection Issues

• Use choice-of-law/forum-selection provisions where

possible, but…

Forum selection clause unenforceable if the product of

• verreaching, if against public policy, or if unreasonable or
• verly burdensome

Choice-of-law provision unenforceable if chosen state lacks

substantial relationship, or application of its law is contrary to state with materially greater interest

Courts can reach different conclusions as to enforceability on

similar facts

Wrong forum in state court can result in dismissal—in federal

court you will simply get transferred

You can find yourself in a jurisdiction you didn’t intend when

you go to enforce

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Choice of Law/Forum Selection: California

• Avoid California at all costs

Non-competes/non-solicitations are unenforceable

– Cal. Business and Professions Code Sec. 16600 – Edwards v. Arthur Anderson, 44 Cal. 4th 937 (2008)

Can’t restrain competition/solicitation to protect

misappropriated trade secrets

– The Retirement Group, Inc. v. Galante, 176 Cal. App. 4th 1226 (2009) – You can get an injunction to prevent further use of trade secrets

Can face liability if efforts to implement or enforce

result in employee’s job loss

– D’Sa v. Playhut, Inc., 85 Cal. App. 4th 927 (2000)

Choice-of-law/forum-selection provisions

traditionally are unenforceable

– But see Meras Engineering, Inc. v. CH20, Inc., Case No. C-11-0389 (N.D.

• Cal. Jan. 14, 2013) (enforcing forum selection clause requiring litigation of

non-compete in Washington)

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Choice of Law/Forum Selection: Other States

• Know your state…

Some states regulate this area by statute, others by common law–

stay on top of recent changes…

– New Hampshire: New law (HB 1270) effective July 14, 2012, makes non-

compete/non-piracy agreements unenforceable if not presented to employee before or at time of offer or change in position.

– Georgia: New law (O.C.G.A. § 13-8-51 et seq.) effective May 11, 2011,

makes restrictive covenants enforceable if reasonable.

– Texas: Supreme court ruling makes enforcement under Tex. Bus. & Com.

Code § 15.50(a) easier, by expanding scope of acceptable consideration. Marsh USA Inc. v. Cook, 354 SW 3d 764 (Tex. 2011).

– Update choice-of-law/forum agreements, and support with consideration

Is it a “blue pencil” state? Be aware of your potential bench

• Ohio is generally a favorable forum

Restrictive covenants are enforceable if reasonable Reform state

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Considerations for States that Generally Do Not Enforce Post-Termination Noncompetes (E.g., CA, ND, OK)

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California

California greatly restricts the enforceability of noncompete

agreements – such agreements are void as against public policy except in very limited situations

• Cal. Business & Professions Code §16600:
• “Except as provided in this chapter, every contract by which anyone is

restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

• Cannot fire or refuse to hire an employee for refusal to sign
• An employer can still prevent employee from misappropriating

trade secrets, even without a non-compete agreement

• Certain exceptions for sale of business

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North Dakota

North Dakota models its statute prohibiting non-competes on

California and also restricts the enforceability of noncompete agreements – such agreements are void as against public policy except in very limited situations

N.D. Code§9-08-06:

• “Every contract by which anyone is restrained from exercising a lawful

profession, trade, or business of any kind is to that extent void.”

N.D. Courts look to California law

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Oklahoma

• Generally void but Oklahoma does permit non-solicitation of

customer provisions

• 15 O.S. sec. 219.A

“A person who makes an agreement with an employer, whether in

writing or verbally, not to compete with the employer after the employment relationship has been terminated, shall be permitted to engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as the former employee does not directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer.”

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Drafting & Enforcing Tips For CA, ND & OK

• Some businesses (particularly multi-state employers who can

institute valid restrictive covenants as to non-CA, ND and OK employees) nevertheless distribute overly broad agreements because of the perceived deterrent effect.

• Agreements acknowledging employees’ obligations to keep

confidential proprietary and trade secret information confidential

Drafting tip:

– Specify precise categories of information to keep confidential – If possible, describe “competition” – The more specificity the better

• Remember forum selection clause and choice of law
• When enforcing, develop a strategy and realistic expectations of

forum selection

• Consider declaratory judgment actions

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Drafting Considerations for States that Do Enforce Post-Termination Noncompete (the other states)

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Restrictive Covenants: “reasonableness”

• Enforceability: Rule of reasonableness
• Restrictive covenants are recognized in many states as valid and

enforceable so long as they impose reasonable restrictions upon an employee that are no greater than necessary to protect the employer’s legitimate interests.

• Means different things under different state laws/different

applications of “reasonable” test

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Critical Elements of Non-Compete Agreement

Four General Requirements:

• 1. Consideration in exchange for non-compete

Offer of employment / continued employment Promotion/change in job duties

• 2. Tailored to protect legitimate business interest

Long-term customer relationships Goodwill Trade secrets Other confidential information

• 3. Non-compete reasonably related to legitimate business interest

in terms of time, geographical area, and scope of the prescribed activity

• 4. Non-compete must not run counter to public policy of the state

in which it is enforced

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State law variations: Consideration

• At-will Employment

Beginning v. Continued – Most states: at-will employment at inception is sufficient

» And some of these say continuing at-will employment enough – E.g., AZ, OH, NJ, NY – yes; DC – likely

• More than At-Will Employment

Something more needed: E.g., CT, MN, NC, OR, SC, TX, VA,

WA, WV, WI, TN—unless employment continued for long period after

– E.g., Promotion, term employment/notice, bonus, stock

• ptions

Illinois – At-will employment insufficient; 2 or more years

continued at-will employment required or additional consideration

– Fifield v. Premier Dealer Serv., Inc., Ill. App. Ct. (June 24,

2013)

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State law variations: Judicial Review

• Reformation (reform to make reasonable)

E.g., DC, FL, OH, NJ, NY, MO, TX (now GA)

• Blue Pencil (strike from existing K)

AZ, CO, CT, DC, ID, IN, MD, LA—if K permits, NC,

SC, WI

• Red Pencil (“All or Nothing”)

NE, VA (formerly GA)

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Blue Pencil Drafting Example

• During the term of employment and for the period of twelve (12)

months following the termination of employment for any reason (or for no reason), the Employee shall not, directly or indirectly, anywhere within (i) the United States, (ii) within 50 miles of any city or other geographic area in which the Company engages in business, and iii) within 50 miles of any city or other geographic area in which the Employee engaged in business for the Company, develop website content for pharmaceutical companies, physicians, practice managers or patients similar to that which Employee developed for the Company, or engage in any other business activities similar to the business engaged in by the Company,…

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Restrictive Covenants: Scope

• Customer Restrictions

Only those with whom personally dealt/responsible: (e.g., NY,

MD, Cal, Tex)

All customers of company (e.g., OH)

• Geographic

Where employer v. employee did business

• Length of Time

Some State Statutes Identify Reasonable/Unreasonable

Length of Time

– E.g., Florida & Louisiana and 2 years

Others establish through decisions

• Exemptions

E.g., attorneys, professionals (AL); broadcasters, physicians

(DE, KY, MA, TN/TX—certain circs); other ethics codes/industry regulations—e.g., financial services)

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Restrictive Covenants: other terms to consider

• Terms Beneficial to Employer

Term requiring employee to pay attorneys fees expended by employer

to enforce the agreement

Exclusive/consent to jurisdiction Successorship clause Consent to inform subsequent employers of agreement

• “Program” Issues (restrictive covenants for multi-state

employers)

Consistency of use Restrictions tailored to individuals to the extent possible

– “One size fits all” approach can be a costly mistake

Know your objectives: true enforceability v. presumed deterrent effect

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Noncompetes: Critical Tips

• Anticipate the jurisdiction in

which you will litigate your clause

• Know that jurisdiction

» What is sufficient consideration? » Do state laws/court opinions restrict scope/enforcement » Choice of jurisdiction v. public policy »

Will a court in that jurisdiction modify an otherwise unenforceable clause, and if so, by:

» Blue pencil? Red pencil? » Reformation?

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Alternatives Ideas

• Benefits/Comp Forfeiture

Varies state-by-state.

– Generally not enforceable in CA if it pertains to

accrued/vested compensation.

– New York Employee Choice Doctrine » Employee has choice between forfeiture of benefit (e.g. stock options) or compliance with noncompete » Noncompetes enforced without regard to reasonableness where the employee voluntarily resigns

Disincentives to competition as opposed to a complete

bar

• Post-termination consultancy agreements aka “garden

leave” clauses

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Questions?

Susan M. DiMickele, Partner Squire Sanders (US) LLP Labor & Employment susan.dimickele@squiresanders.com +1.614.365.2842 +1.212.872.9828 Meghan Hill, Senior Associate Squire Sanders (US) LLP Labor & Employment Meghan.hill@squiresanders.com +1.614.365.2720 +1.212.407.0105

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