On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (NPRM) to broadly ban the use of non-compete covenants throughout the country. The proposed rule, which would supersede all contrary state laws, is remarkable for its sweeping definition of “non-compete clauses” that fall within the ban. Jackson Lewis provided an initial alert on the proposed rule and now undertakes a more thorough review of the proposal, including a summary of what the proposed rule contains; employers and persons excluded from coverage under the proposed rule; the potential implications to employee benefit plans; and the next steps in the rulemaking process. That review may be found here: A Deeper Dive Into FTC’s Proposed Non-Compete Rule.
The Federal Trade Commission (FTC) has issued a Notice of Proposed Rulemaking to broadly ban the use of non-compete covenants throughout the country. The proposed rule, which would supersede all contrary state laws, would extend to “de facto” non-compete clauses, i.e., contractual provisions that have the effect of prohibiting workers from seeking or accepting employment or operating a business after the conclusion of the worker’s current employment.
For a more extensive discussion of the proposed rule, see our Article, Federal Trade Commission Proposes Broad Ban on Use of Non-Compete Covenants.
Having initially enacted a total ban on non-compete agreements that went so far as to ban prohibitions against moonlighting with competitors, the District of Columbia City Council has significantly changed the law’s scope. Details of the amended D.C. “ban,” including how the act permits non-compete agreements for “highly compensated employees,” are laid out the article, D.C. Mayor’s Signature Puts Modified Non-Compete Ban on Track for October 1st Effective Date, written by Jackson Lewis Restrictive Covenant Practice Group members Matt Nieman, Joe Schuler, and Caroline Cheng.
Governor Jared Polis has now signed HB 22-1317, significantly limiting the enforceability of non-compete agreements executed after August 10, 2022 — the law’s effective date — for employers with employees working or living in Colorado. For details of, and a brief Q&A on, the new law, see the articles Colorado Poised to Further Limit Use of Non-Compete Agreements, Raise Penalties for Non-Compliance and Colorado’s New Non-Compete Law Signed by Governor, Will Go into Effect on August 10, 2022, by Jackson Lewis attorneys Tim Kratz and Francis Wilson.
If you have any questions about the new Colorado law, Colorado’s non-compete statute, C.R.S. § 8-2-113, or any other restrictive covenants issue, please contact a Jackson Lewis attorney.
On May 2, 2022, the New Jersey State Assembly introduced Assembly Bill (AB) 3715 that, if enacted, would significantly limit the use and enforceability of certain restrictive covenant provisions, while mandating additional procedural requirements. AB 3715 is similar to prior bills introduced in the New Jersey legislature in recent years, and part of the ongoing effort in the Garden State to drastically alter the non-compete landscape. See New Jersey General Assembly to Vote on Renewed Bill Seeking to Curb Restrictive Covenants; New Jersey Restrictive Covenant Bill Aims to Change the Landscape.
AB 3715 codifies the State’s common law requirement that a restrictive covenant agreement must be no broader than necessary to protect the employer’s legitimate business interests, must not be unduly burdensome on the employee, and cannot be injurious to the public or inconsistent with public policy.
Significantly, the bill includes multiple additional barriers to traditional restrictive covenants that otherwise may be enforceable under current law. For example, under the bill, a restrictive covenant agreement:
- must be disclosed to the employee by the earlier of a formal offer of employment or 30 business days before the commencement of employment or, if the agreement is entered into after commencement of employment, must be provided to the employee at least 30 business days before the agreement is to be effective;
- must be limited to a duration of no more than 12 months following the employee’s termination;
- must be limited to the geographic area(s) in which the employee provided services, or had a material presence, during the two years preceding the employee’s termination, and cannot prohibit the employee from seeking employment in other states;
- must be limited to only the specific types of services provided by the employee during the last two years of employment;
- cannot penalize an employee for defending against or challenging the enforceability of the restrictive covenant(s). The bill is unclear as to whether a restrictive covenant may include a fee-shifting provision in favor of the employer or the prevailing party, where an employer successfully enforces a covenant against a breaching employee;
- cannot contain a choice of law provision that would have the effect of circumventing the bill’s proscriptions (with limited exceptions); and
- cannot prevent an employee from providing a service to the employer’s customer or client, if the employee does not initiate or solicit the customer or client. Whether the employee engaged in an “initiation” or “solicitation” – neither of which is defined in the bill – is an issue that likely will be litigated, especially where an employee engages in arguably subtle or passive conduct.
In addition to the above limitations, AB 3715 establishes several categories of employees against whom a restrictive covenant agreement cannot be enforceable, including:
- an employee who has been terminated without a determination of misconduct;
Under the bill, “misconduct” is defined as “conduct which is improper [and] . . . not a good faith error of judgment or discretion, and is either a deliberate refusal, without good cause, to comply with the employer’s lawful and reasonable rules made known to the employee or a deliberate disregard of standards of behavior the employer has a reasonable right to expect.”
- non-exempt employees, as defined under the Fair Labor Standards Act;
- employees under age 18;
- undergraduate or graduate student interns;
- seasonal employees, temporary employees, or independent contractors;
- low-wage employees, defined as an employee whose average weekly earnings are less than the statewide average; and
- employees employed less than one year.
Additionally, an employer must notify the employee in writing, within 10 days of the employee’s termination, of its intent to enforce a restrictive covenant agreement and must pay the employee 100 percent of the employee’s wages and fringe benefits during the period of enforcement of a restrictive covenant. While these requirements would not apply to terminations for misconduct, they would apply to employee resignations, possibly creating the opportunity for an employee anticipating termination to preemptively resign and invoke application of the notice-and-pay provisions.
Finally, the bill expressly permits an employee to bring a civil action against their employer for alleged violations of the bill’s provisions, within a two-year statute of limitations. The court could then void the agreement and order “all appropriate relief,” including issuing of an injunction against the agreement’s enforcement and awarding of damages and attorneys’ fees.
As noted above, similar bills have been introduced in recent years, as far back as 2017 and most recently in February 2022, when the New Jersey Senate introduced SB 1410. That bill has made no progress since its introduction and it remains to be seen whether AB 3715 will fare any better. Still, employers should be mindful of this most recent legislative effort, as ultimately it could substantially change how they draft their future restrictive covenant agreements. Jackson Lewis will continue to monitor both AB 3715 and SB 1410 and will report on developments as warranted.
In the meantime, if you have any questions about these bills or any other issue regarding New Jersey restrictive covenant law, please contact the Jackson Lewis attorney(s) with whom you regularly work or the author of this post.
The Colorado Senate recently passed House Bill 22-1317 which, if enacted into law, would significantly limit the enforceability of any non-compete agreements executed after the law’s effective date for employers with employees working or living in Colorado. If Governor Polis signs the proposed legislation, it could go into effect as early as August 10, 2022. For more details on the bill, which would amend Colorado’s non-compete statute, C.R.S. § 8-2-113, see the article by Jackson Lewis attorneys Tim Kratz and Francis Wilson, here.
As reported in a web article prepared by our D.C. colleagues Matt Nieman, Joe Schuler, Caroline Cheng, and Alyssa Testo, found here, the District of Columbia Council again has deferred the “applicability date” of the D.C. Non-Compete Ban, this time to October 1, 2022. We previously reported about this law, and the first deferral of the applicability date to April 1st. The latest deferral hopefully will give the D.C. Council the time needed to consider and adopt needed amendments to allow employers to prohibit employees from engaging in conflicts of interest and misusing their confidential information both during or after employment.
The essence of the non-compete ban itself, however, is expected to remain intact. Employers should anticipate the ban to become fully applicable as of October 1, 2022. Jackson Lewis attorneys can assist D.C. employers (and any employer with staff in D.C.) to comply with the ban.
In MetroHealth Sys. v. Khandelwal, 2022-Ohio-77, Ohio’s Eighth District Court of Appeals affirmed a trial court’s modification of a noncompete agreement between a hospital and a physician formerly employed by the hospital. Both courts reasoned that modifying the agreement, rather than striking it, protected the hospital’s interest.
The disputed noncompete agreement provided that the defendant physician, a specialized burn surgeon who had acted as interim director of the plaintiff hospital’s burn center, could not provide similar services within 35 miles of the plaintiff hospital for two years after his termination of employment. The physician resigned and accepted the position of director at a burn center less than 35 miles away. The hospital sued and sought a preliminary injunction to prohibit the physician’s new employment.
Following an evidentiary hearing, the trial court entered an order modifying the scope and duration of the noncompete clause. The trial court held that the physician could immediately begin employment as a surgeon with his new employer. The trial court, however, enjoined him from (1) assuming the role of director for one year, (2) using or transmitting privileged information gained through his previous employment, and (3) personally soliciting or referring any patient from his previous employment for one year. The plaintiff hospital appealed the trial court’s order, seeking to enforce the noncompete clause as written.
Ohio courts will enforce noncompete and nonsolicitation agreements that are reasonable. If a court finds such an agreement unreasonable, it will enforce it only “to the extent necessary to protect an employer’s legitimate interests.” 2022-Ohio-77, ¶12. And, important here as reinforced by this decision, “[c]ourts are empowered to modify or amend employment agreements to achieve such results.” Id.
While Ohio courts disfavor noncompete agreements in the medical profession, they are not per se unreasonable. Rather, courts consider them unreasonable when they impose an undue hardship on the physician and are injurious to the public; the physician’s services are vital to the healthcare and treatment of the public; and the demand for the physician’s medical expertise is critical to the people in the community.
In examining whether the agreement was reasonable, the appellate court weighed (1) the plaintiff hospital’s legitimate business interest, (2) whether the physician would endure undue hardship should the court uphold the agreement, and (3) if upholding the agreement would injure the public. While the appellate court agreed that the noncompete agreement’s two-year duration was “more restrictive than necessary,” it affirmed that the plaintiff hospital had a legitimate business interest in protecting the confidential information and any resulting competitive advantage of its burn center. The Court of Appeals upheld the agreement as modified to restrict the physician’s employment as director at his new employer for one year.
This decision highlights to employers the importance of drafting effective noncompete agreements, and serves as reminder that some courts may modify the scope of such agreements if they find them unreasonable.
Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to help in these situations. Please contact a Jackson Lewis attorney if you have any questions.
The Federal Trade Commission (FTC) and the Department of Justice (DOJ) hosted a virtual workshop on December 6-7, 2021, bringing together agency representatives, lawyers, economists, academics, and other experts to discuss issues affecting competition in the labor market (“Workshop”).
We attended the Workshop virtually and co-signed a response letter (drafted by our friends Russell Beck and Erika Hahn at Beck Reed Riden LLP). We provide our perspective on the Workshop and the key points of the response letter below.
How We Got Here
The Workshop is the latest step in the federal government’s increasing interest in potentially regulating contracts between employers and employees (an area typically governed by state common law) under the auspices of promoting competition in the labor market.
Going back to October 2016, President Barack Obama issued a “State Call to Action on Non-Compete Agreements” to “address wage collusion, unnecessary non-compete agreements, and other anticompetitive practices.” Several states have since taken up the “Call to Action” and passed laws regulating non-competes and other restrictive covenants, imposing various rules like minimum salary requirements, advance notice requirements, and temporal or geographic scope restrictions. Perhaps predictably, since they are the “laboratories of democracy,” no two states legislated in the same exact way.
The FTC already hosted one workshop in January 2020 “to examine whether there is a sufficient legal basis and empirical economic support” to restrict non-competes. As we noted then, there was significant debate about whether the FTC could, legally, regulate this area of law.
Then, this summer, President Joe Biden issued a wide-ranging Executive Order that, among many other competition-focused objectives, encouraged the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
This is the context in which the FTC and DOJ hosted the Workshop, which included a broad range of topics and perspectives—from worker misclassification to the potential effects of mergers and acquisitions on wages.
Takeaways from the Workshop
The Workshop was heavy on theory and light on concrete proposals. The presenters offered fascinating perspectives that often clashed in fundamental ways. We perceived these themes from the discussion:
- The FTC and DOJ appear poised to use current antitrust law to attack alleged “monopsonistic” practices.
Several commenters suggested current antitrust laws (such as the Sherman Antitrust Act) apply with equal weight to so-called “buyer side” anticompetitive practices—situations in which employers are “buying” labor rather than “selling” products. On the “seller side,” a company might violate antitrust laws if it behaves as a “monopoly” (the lone seller of a product in a market) and unfairly manipulates consumer prices. Whereas in the “buyer side,” a company might be a “monopsony” (the lone employer, or labor buyer, in a market) and unfairly manipulate wages. There was significant debate about whether, and to what extent, current antitrust laws might apply to alleged “monopsonistic” practices.
- A potentially wide range of current practices could be considered “monopsonistic.”
When discussing what might constitute an unlawful “monopsonistic” practice, Workshop participants highlighted several issues: consolidation of labor markets through mergers; use of non-compete agreements; use of non-disclosure agreements prohibiting employees from discussing wages or alleged unlawful employer conduct; use of training repayment agreements that force workers to stay in their jobs or face a steep financial penalty; and worker misclassification, either through franchises or independent contractor relationships.
Several of these issues already garner scrutiny under other laws, like the National Labor Relations Act and Fair Labor Standards Act. But the question discussed in the Workshop was whether these practices might be punishable as antitrust violations, potentially carrying severe civil and criminal penalties.
- The discussion on non-competes conflicted with our experience as practitioners.
Several participants in the Workshop raised alarm bells about the use of non-competes with low-wage workers who seldom have access to trade secrets or confidential information. Some then suggested that because non-competes are sometimes used inappropriately, the federal government should ban all non-competes.
But as we noted in the letter we co-signed in response to President Biden’s Executive Order, such occasional abuse of non-competes does not warrant a complete ban. Even in states that do not currently ban non-competes with low-wage workers, courts have hundreds of years’ experience ferreting out situations like those described with concern in the Workshop, where a non-compete would most likely be held unenforceable under existing common law if it is not narrowly tailored to protect a legitimate business interest.
Employers seeking to enforce unlawful contracts also may expose themselves to civil penalties (in some jurisdictions), common law tortious interference claims, liability for the employee’s attorneys’ fees, or other potential claims. It is inaccurate to suggest that, without federal intervention, employers face no consequences for attempting to enforce unlawful non-competes.
That being said, we recognize that the overwhelming majority of non-competes that are signed are never litigated. Even if there is validity to the concern that some employees do not seek certain competitive employment because they believe they are contractually restricted from doing so (although the contract at issue may be of questionable enforceability), we do not think this concern justifies federal overhaul of restrictive covenant law.
Our Response Letter
The FTC and DOJ accepted comments from the public on the issues addressed in the Workshop through December 20, 2021, and we jointly submitted a letter co-signed by 70 leading lawyers and paralegals around the country who practice in restrictive covenant law. Our submission cited new research that casts doubt on some of the prior research in this area.
In one example, researchers noted that companies often “bundle” restrictive covenants together into a single contract (this matches our experience), thus calling into question the results of prior studies focusing just on non-competes, which could be “misleading.” Further, although not materially addressed in the Workshop, we are experiencing one of the greatest periods of employee mobility in recent memory in the “Great Resignation.” This seems to run counter to the idea that non-competes stop workers from leaving their employers. Finally, we noted that non-competes have been used around the country throughout the entire arc of the nation’s rise to economic power. Imposing a fundamental change in how companies protect themselves from unfair competition could have drastic, unforeseen consequences.
The Workshop did not reveal whether the federal government will regulate non-competes or restrictive covenants. Encouraging a robust, competitive labor market is clearly a priority for the Biden Administration, the FTC, and the DOJ. It is not clear that use of non-competes or other restrictive covenants has any impact, positive or negative, on the competitiveness of the labor market as a whole.
We will continue to monitor these issues as they progress. In the meantime, employers should consider discussing with counsel alternative ways to protect their interests in the event the federal government takes a hard stance on non-competes. Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to help.
 Note that these types of provisions are distinguishable from non-disclosure agreements preventing employees from using or disclosing an employer’s trade secrets or confidential business information. The Workshop participants did not seem to believe these types of contracts trigger the same concerns.
In many non-compete cases, the employer seeks a temporary injunction at the outset of the case to prevent further harm. If the employer loses that motion, the case usually settles or proceeds to discovery as in a standard civil action. However, there can be another option—immediate appeal. A recent Florida appellate decision demonstrates why this can be a winning strategy in the right circumstances.
In AmeriGas Propane, Inc. v. Nelson Sanchez, et al., No. 3D20-1447 (Fla. 3d DCA Nov. 3, 2021), the plaintiff AmeriGas, a provider of propane services to businesses, sued its former account manager, defendant Sanchez, and his new employer, defendant Blossman Gas, a direct competitor. During his employment with AmeriGas, Sanchez entered into an agreement that included non-disclosure, non-competition, and non-solicitation covenants.
Soon after Sanchez left AmeriGas for Blossman Gas, AmeriGas lost 18 customers to Blossman Gas that Sanchez previously managed. AmeriGas filed suit asserting breach of contract claims against Sanchez and tortious interference claims against Sanchez and Blossman Gas. AmeriGas then filed a motion for temporary injunction seeking to enjoin Sanchez from breaching his contractual obligations. AmeriGas also sought to enjoin Blossman Gas from tortiously interfering with its agreement and assisting Sanchez in violating the restrictive covenants.
Trial Court Denies the Motion for Temporary Injunction
During his deposition, Sanchez admitted to enrolling several customers on behalf of Blossman Gas that he previously serviced at AmeriGas, approaching other AmeriGas customers with offers from Blossman Gas, and telling other AmeriGas customers to contact him for service at Blossman Gas. Despite this evidence, the trial court denied AmeriGas’s motion for temporary injunction, finding that it failed to establish a likelihood of success on the merits because it failed to prove that Sanchez directly solicited customers in violation of his contract.
Victory on Appeal—with a Bonus
Perhaps because AmeriGas presented strong evidence, AmeriGas elected to take an immediate appeal from the trial court’s denial of its motion for a temporary injunction. State law varies greatly with respect to the appealability of a non-final, or interlocutory, ruling, but the Florida appellate court concluded the immediate appeal was proper.
The appellate court reversed the trial court and concluded AmeriGas established the factors necessary to obtain a temporary injunction. First, the court held AmeriGas established its legitimate business interest in the covenants, based on valuable confidential business information and substantial relationships with specific prospective or existing customers. The court also concluded AmeriGas had presented sufficient evidence of breach, despite the trial court’s interpretation of the evidence to the contrary. Finally, the court concluded AmeriGas was entitled to a presumption of irreparable harm under Florida law because it established violation of a restrictive covenant, which the defendants could not overcome.
Thus, the appellate court reversed and remanded with instructions for entry of the temporary injunction.
Keep in mind AmeriGas obtained this appellate ruling more than two years after defendant Sanchez left AmeriGas—in fact, several months longer than the two-year temporal scope of the restrictive covenants. Why would AmeriGas go through the trouble of appealing denial of the motion for temporary injunction if the restrictions ran during the pendency of the appeal?
Under Florida law, entry of an injunction entitled AmeriGas to restart the clock, so to speak. The appellate court noted in its opinion that “AmeriGas is entitled to the two-year duration of its restrictive covenants” on remand.
Taking an immediate appeal from the denial of a motion for temporary relief can be an effective tactic. Employers should consider whether taking an appeal would be procedurally proper, and whether reversal of the trial court would entitle the employer to extend the restrictive covenants. The appellate process can take time, so if there is a risk the restrictions will not be tolled, immediate appeal may not be worth it.
Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to assist in these situations.