Restrictive Covenants in a Multistate Business Labor & Employment Educational Webinar Series September 11, 2013 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 39 Offices in 19 Countries
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 2
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 3
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. 4
Types of Restrictive Covenants • Non-competition � “no work” • Non-solicitation � Customers � Suppliers � Employees • Non-d isclosure: Not talking about this today! – However, are occasional state variations » E.g., Georgia and two years 5
Choice of Law/Forum Selection Issues • Use choice-of-law/forum-selection provisions where possible, but… � Forum selection clause unenforceable if the product of overreaching, if against public policy, or if unreasonable or overly 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 6
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) 7
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 8
Considerations for States that Generally Do Not Enforce Post-Termination Noncompetes (E.g., CA, ND, OK) 9
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 • 10
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 11
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.” 12
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 13
Drafting Considerations for States that Do Enforce Post-Termination Noncompete (the other states) 14
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 15
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 16
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 options � 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, 17 2013)
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) 18
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