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.

In Congress, multiple bills have been proposed that would ban non-competes outright, but they have not yet garnered wide support in either party.

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:

  1. 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.

  1. 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[1]; 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.

  1. 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.

Conclusion

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.

 

[1] 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.

Background

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.

Takeaways

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.

Employers in the U.S. are facing regulatory upheaval on multiple fronts. The federal government has taken up a new interest in potentially limiting the applicability of restrictive covenants, such as non-compete agreements. Meanwhile, the Occupational Safety and Health Administration (OSHA) has issued an Emergency Temporary Standard (ETS) (currently stayed by the Fifth Circuit) requiring employers with 100 or more employees to ensure all employees are either vaccinated or taking weekly COVID-19 tests.

These seemingly disparate legal trends are colliding in recent federal and state bills.

On November 3, 2021, nine Republican House Members sponsored a Federal bill that would void existing non-compete agreements for any employee who is fired for “not receiving a COVID-19 vaccine.” The bill would also require the Federal Trade Commission (FTC) to issue regulations prohibiting employers from enforcing non-compete agreements with such employees.

Similar bills have been introduced around the country. The trend began in Texas and Tennessee, then New Hampshire followed suit on November 16, 2021.

The Tennessee bill has even more “bite” than its federal and state companions. If a private employer requires the signing employee to receive a vaccine as a condition of employment, any non-compete, non-solicitation, non-disparagement, or confidentiality provision entered after the effective date of the proposed law would be void and unenforceable. Even if the employee gets the vaccine voluntarily and later resigns to work for a competitor, these provisions would be void simply by virtue of the employer having required the vaccine in the first place.  (Which, of course, may be mandatory under federal law.)

Whether any of these bills actually gains traction remains to be seen. We will continue to monitor this legislation and post updates once we know more. In the meantime, Jackson Lewis attorneys are available to assist employers navigate regulatory changes in these, and other, areas of law.

Including non-compete covenants in physician employment and shareholder agreements is common practice. Whether they are legally enforceable as drafted varies from state to state. In this podcast, Jackson Lewis attorneys explore how hospital systems and medical groups can protect their goodwill and legitimate business interests.

The Illinois General Assembly passed a major bill in May that significantly alters how and when employers can use restrictive covenants with Illinois employees.  Illinois Governor JB Pritzker signed the bill into law on August 13, 2021, and it will go into effect January 1, 2022.

We provided details and analysis on the new law here.  At a high level, the new law: (a) prohibits the use of non-compete agreements with employees paid less than $75,000 per year; (b) prohibits non-solicitation agreements for employees paid less than $45,000 per year; and (c) codifies the rule under Fifield and Enterprise Financial Group, Inc. v. Premier Dealer Services, Inc., 373 Ill. Dec. 379, 993 N.E. 2d 938 (Ill. App. Ct. 2013), requiring employers to provide employees with “at least two years or more of continued employment” as consideration for signing a restrictive covenant, if at-will employment alone (as opposed to some other “professional or financial benefits”) is the consideration for the agreement. The law also requires employers to advise employees in writing to seek attorney consultation and provide at least 14 calendar days to review the agreement before signing.

Illinois employers are encouraged to review their current restrictive covenant agreements and bring them into compliance before the January 1, 2022 effective date of the amendments.

Earlier this month, President Joseph Biden issued an Executive Order encouraging the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

We joined more than 50 lawyers and paralegals around the country – all of us experienced restrictive covenant practitioners – in signing a joint letter urging the White House and the FTC to exercise caution in regulating non-compete agreements.

Drafted by our friend Russell Beck of Beck Reed Riden LLP, with input from us and some of the other signatories, the letter describes the long-recognized benefits of reasonable non-compete agreements and other restrictive covenants, particularly protecting valuable trade secrets from misappropriation. Indeed, non-compete agreements have been enforced as valid and reasonable in most states for hundreds of years. The letter also dispels common misconceptions about non-compete agreements, including the idea that all non-competes are necessarily abusive to employees.

While taking no position on whether the FTC legally can regulate this area of law, we suggest the FTC act judiciously, if at all. For example, rather than issuing a complete ban, the letter proposes the FTC consider prohibiting non-competes for low-wage workers only and require that employers give advance notice of non-compete provisions to employees before requiring them to agree. We believe that more modest regulations can be designed to balance competing interests of employers and employees, especially in light of the state-specific legislation, common law history, and the very capable job courts have done to enforce what is reasonable under the facts of the cases presented.

We will continue to monitor these regulatory developments. In the meantime, employers should consider taking proactive steps to protect their interests. Attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to advise on these issues.

The District of Columbia passed one of the nation’s most stringent regulations on covenants not to compete earlier this year. Except in very limited circumstances, the law states employers may not require or request employees sign an agreement that includes a non-compete provision, and employers cannot have a workplace policy that prohibits an employee from “(1) [b]eing employed by another person; (2) [p]erforming work or providing services for pay for another person; or (3) [o]perating the[ir] own business.”

As we noted at the time, although the law was passed and signed by Mayor Muriel Bowser, its restrictions would not become “applicable” until the fiscal effects of the law were included in an approved budget and financial plan.

On July 20, 2021, the D.C. Council had a first reading on the Fiscal Year 2022 Budget Support Act of 2021. Buried in this wall of text is a provision that would amend Section 302 of the non-compete act to include an “applicability date” of April 1, 2022.

So, April 1, 2022 is the date we are eyeing for the D.C. non-compete ban to “apply.” Of course, things could change, but this is as strong an indicator as we have seen. We will continue to monitor these developments and provide an update once the “applicability date” for the D.C. non-compete ban is confirmed.

In the meantime, employers should act now to ensure they do not run afoul of the D.C. non-compete ban once it does become applicable. Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to advise on these issues.

There have been whispers of federal regulation of non-compete agreements for years. Multiple bipartisan bills aiming to ban non-competes have fallen to the wayside without traction. The Federal Trade Commission hosted a workshop in January 2020 (attended by our own Erik Winton) “to examine whether there is a sufficient legal basis and empirical economic support” to restrict non-competes.

Today, President Biden took another step toward federal regulation by issuing a sweeping Executive Order that, among many other competition-focused objectives, encourages the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

Although the White House Fact Sheet and most media reports characterize this portion of the Executive Order only with respect to “non-compete agreements,” the actual text goes further. It applies to non-compete provisions “and other clauses or agreements that may unfairly limit worker mobility.” This language arguably may include other restrictive covenants that are currently enforceable in most jurisdictions, such as customer and employee non-solicitation provisions, no-hire provisions, and non-servicing provisions.

To be clear, the Executive Order does not change the law of restrictive covenants by itself. Much remains to be done before a ban or limitation on such agreements by the FTC becomes a reality.

Again, the FTC already conducted a thorough examination of non-competes 18 months ago, and so far, nothing has come of it. Crucially, the FTC examined not only “why” it should consider regulating non-competes (a question hotly debated with ample evidence on both sides, despite the White House’s citation only to pro-regulation evidence), but also “how” the FTC could act.

Several panelists questioned whether the FTC could regulate this area of law through rulemaking even if it were inclined to do so. However, the Executive Order specifically encourages the FTC to “exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act” to regulate restrictive covenants. This process may require several steps, including publishing a detailed and specific notice of any proposed rulemaking, the draft text of the rule, and the reason for the proposed rule. Rulemaking potentially could be a years-long process.

Even if the FTC engages in rulemaking, it remains unclear what level of regulation it may pursue. Note the Executive Order encourages regulation only of “the unfair use” of non-compete clauses and other restrictive covenants. This choice of language might suggest that not all use of such agreements is “unfair,” in President Biden’s view? The ultimate scope of any rulemaking remains to be seen.

The Executive Order raises many questions and does not cause any immediate changes to restrictive covenant law. Even so, employers should start thinking about how to protect their business interests if the FTC were to ban some or all non-competition agreements or other restrictive covenants.

As many readers know, using restrictive covenants represents just one of several business protection strategies. Companies should discuss alternative strategies, policies, and best practices with their counsel. Attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to advise on these issues.