December 27, 2018

Top 10 Noncompete Developments of 2018

2018 was a challenging year for advocates of noncompetition agreements. Courts and legislatures across the country worked to limit the application and enforcement of noncompetes, continuing to signal aversion to employer efforts to limit the post-employment activities of former employees as a means of protecting against unfair competition. From court rulings to new and pending legislation, these 10 items reflect an increasingly difficult environment for noncompete agreements.

1. Massachusetts Adopts Restrictive Noncompete Legislation

With the adoption of the Massachusetts Noncompetition Agreement Act (MNAA), Massachusetts now joins the growing list of states where employers will face difficulty enforcing noncompete agreements. The MNAA, which applies to all noncompete agreements entered into on or after October 1, 2018 by Massachusetts employees and independent contractors, places a number of new limits on post-employment restrictive covenants. Most notably:

  • New employees who are expected to sign a noncompete agreement at the inception of their employment must be presented with the agreement when a formal offer is extended or 10 business days before the employees’ start date, whichever is earlier.
  • Noncompete agreements entered into after employment has begun must be supported by independent consideration (continued employment is insufficient) and must be provided to the employee at least 10 business days before the agreement becomes effective.
  • To be enforceable, a noncompete agreement must advise the employee to consult with an attorney.
  • Noncompete restrictions may not exceed one-year in length, unless the employee has breached a fiduciary duty or taken employer property (in which case the agreement may be tolled for up to two years from separation of employment).
  • Where “garden leave” is the consideration supporting the agreement, the employer must agree to pay 50 percent of the employee’s highest recent salary during the restricted period.
  • A noncompete agreement will not be enforced against non-exempt employees, students in short-term employment, employees age 18 or younger, or employees who have been laid off or whose employment has been involuntarily terminated without cause.
  • Actions seeking to enforce such agreements must be brought in the county in which the employee resides or, if the parties so agree, Suffolk County.

The new law does not apply to noncompete agreements made in connection with the sale of a business or entered into as part of a separation agreement. In addition, the restrictions do not apply to customer or employee nonsolicitation agreements or non-disclosure agreements.

2. Idaho Rolls Back Irreparable Harm Presumption for Key Employees

In March 2018, Idaho adopted a law rolling back a 2016 change to its noncompete law that made it easier for companies to restrict the movement of “key” employees. A 2008 law had allowed employers to enter into noncompete agreements with “key” employees to protect a legitimate business interest. In 2016, the law was amended to provide that if a company sought injunctive relief against a “key” employee and the court found a violation of the noncompete agreement, the company was entitled to a rebuttable presumption of irreparable harm. To rebut that presumption, the employee had to prove that she had “no ability to adversely affect the employer’s legitimate business interests.” This year, the legislature repealed the rebuttable presumption entitlement, effectively placing the burden back on companies to establish the likelihood of irreparable harm before an injunction can be issued.

3. Wisconsin Applies Restrictive Noncompete Statute to Nonsolicitation Provision

A January 2018 decision by the Wisconsin Supreme Court continued a noteworthy trend of broadly applying Wisconsin’s strict statute governing noncompete agreements. Wisconsin’s noncompete statute subjects all noncompete agreements to exacting scrutiny, requiring that any noncompete: (1) be necessary for the protection of the employer; (2) provide a reasonable temporal and geographic limitation; (3) not impose harsh or oppressive restrictions on the employee; and (4) not contravene public policy.

In Manitowoc Company v. Lanning, 2018 WI 6 (2018), the court invalided an employee nonsolicitation clause, finding that it essentially constituted a noncompete agreement and did not satisfy the requirements of the statute. Specifically, the court found that the nonsolicitation clause prevented the employee from soliciting every one of his former employer’s 13,000 employees worldwide. The court concluded that this restriction prevented the employee from competing fully with his prior employer after joining a competitor, was overly broad on its face and was not necessary for the protection of the employer. The court’s decision serves as a reminder that courts will not exalt form over function when analyzing post-employment restrictive covenants.

4. Illinois Court Adopts the “Janitor Rule”

Attorneys seeking to avoid enforcement of a noncompete often will invoke the “janitor rule,” arguing that if the agreement would prevent their client from working as a janitor for a competitor, the agreement should be deemed overbroad and unenforceable. In April 2018, an Illinois federal court accepted that argument in Medix Staffing Solutions Inc. v. Dumrauf, No. 1:2017cv06648 (N.D. Ill. 2018). The noncompete in that case barred a former sales director from working for nearby companies “engaged directly or indirectly in the business of” the former employer. The court granted the former employee’s motion to dismiss the lawsuit brought against him by his former employer, finding that because the agreement prevented him “from even working as a janitor at another company,” it was overbroad and unenforceable. The court also refused to blue pencil the agreement because it was “patently unfair” as written.

5. New York Rejects Noncompete Agreements for Low-Level Employees

New York Attorney General Eric Schneiderman’s office announced a settlement with a large employer that required a majority of its employees, including low-level reporters and editorial assistants just out of college, to sign noncompete agreements. As part of the settlement, the company is now dropping the noncompete agreement requirement except for a few high-level executives. A statement released by Schneiderman’s office states, in part:

Unless an individual has highly unique skills or access to trade secrets, non-compete clauses have no place in a worker’s employment contract. . . . Unscrupulous non-compete agreements not only threaten workers seeking to change jobs, they also serve as a veiled threat to employers who may be reluctant to hire candidates due to the mere existence of a non-compete agreement. Workers . . . should be able to change jobs and advance their careers without fear of being sued by their prior employer.

6. Utah Restricts the Use of Noncompete Agreements in the Broadcasting Industry

In March 2018, Utah modified its Post-Employment Restrictions Act to curtail the enforcement of noncompete agreements against employees in the broadcasting industry. The new law bars the enforcement of noncompetes on workers who make less than $47,476 per year. For broadcasting employees who meet the salary test, a noncompete will only be enforced if: (1) it is “part of a written employment contract with a term of no more than four years” and (2) the employee is either terminated “for cause,” or the employee breaches the employment contract “in a manner that results in” his or her separation. The new law also contains provisions limiting the duration of a noncompete to the lesser of one year or the remaining term of the employee’s original employment contract.

7. Colorado Limits Noncompete Agreements for Physicians Treating “Rare Disorders”

In April, Colorado narrowed a noncompete law applying to physicians. Though the state has long blocked health care employers from limiting their doctors’ rights to practice medicine, it permits noncompete agreements to require the physician to pay damages in an amount that is reasonably related to the injury suffered because of the competition. In other words, if a physician in Colorado leaves one employer for another, he or she may practice anywhere, but may be compelled to pay damages if the new practice directly competes with the former.

The 2018 amendment shields physicians from damages for providing information and care to patients with a “rare disorder” as defined in accordance with the criteria developed by the National Organization for Rare Disorders, Inc. or any successor organization.

8. South Dakota Invalidates Noncompete Agreement Inconsistent With State Statute

In March 2018, the South Dakota Supreme Court issued a decision in Farm Bureau Life Insurance Co. v. Dolly, 2018 S.D. 28 (2018) that provided a strong reminder of the importance of drafting noncompete agreements that conform with state law. In that case, the employer sought to enforce a noncompete agreement against its former captive life insurance agent which required that he “neither sell nor solicit, directly or indirectly. . . any insurance or annuity product, with respect to any policyholder of [Farm Bureau]. . . for a period of eighteen (18) months following the termination of” his contract.

9. Restrictive Legislation Efforts Stall in New Jersey and Washington

Both the New Jersey and Washington state legislatures considered legislation this year that would have significantly restricted the enforceability of noncompete clauses. Among other things, New Jersey’s proposed law would have: (a) imposed pre-employment notification requirements, (b) limited the duration of such agreements to one year, (c) substantially limited potential geographic restrictions, (d) prohibited retaliation against an employee for opposing the enforceability of a noncompete, (e) prevented use of choice of law provisions to escape the requirements of the new law, and (f) allowed employees to work for an employer’s customers if the employee did not solicit such employment. The bill stalled in committee.

Washington’s proposed law would have: (a) prohibited enforcement of noncompetes against employees earning less than three times the annual state average (or $185,700); (b) imposed pre-employment notification requirements; (c) limited the duration of such agreements to 18 months; (d) imposed fines of $5,000 plus actual damages and legal fees for employers who did not comply. Another law considered in the Washington legislature would have prohibited all noncompetes except those entered into as part of the sale of a business.

While these legislative efforts stalled, they signal a growing national trend of imposing tighter restrictions on the enforceability of noncompete agreements.

10. Minnesota Adopts Inequitable Forfeiture

In July 2018, the Minnesota Supreme Court adopted the concept of “inequitable forfeiture” in determining whether it was appropriate for an employer to refuse to pay over $1 million in post-employment payments to a former regional sales manager who failed to abide by a return of property provision in his employment agreement. In Capistrant v. Lifetouch, 916 N.W.2d 23 (2018), the court found that the return of property provision (which was included in a section of the agreement entitled “Restrictions Against Competition”) was properly deemed a condition precedent of the employee’s receipt of post-employment payments, and further concluded that the employee failed to satisfy the condition precedent by not immediately returning the employer’s property upon his termination of employment. However, the court adopted the equitable concept of “inequitable forfeiture” and remanded to the district court to determined: (a) whether the condition precedent was a “material part of the agreed exchange” upon entering into the contract; and (b) if not, consider whether the forfeiture was disproportionate and, if so, reduce the amount of forfeiture to an appropriate level.

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