Employment Law Blog

Defeating a Non-Compete Agreement

In this post, I’m going to show you EXACTLY how to get out of a New York non-compete agreement. In fact, this is the exact process we use to help all of our clients get out of non-compete agreements.  If you want to get out of a New York non-compete agreement, you’ll like this post.  The graphic above makes it easy to see how this works. You can also visit FindLaw to learn more about non-compete agreements in detail. Let’s dive right in …. 1. Fired Without Cause Were you fired without cause? If you were fired without cause, you most likely have nothing to worry about.  Courts in New York generally will not enforce a non-compete against you in this situation because it’s so unfair. If your employer is not willing to employ you, then it cannot prevent you from working within your field. It’s just that simple.  Also, most firings are without cause. Cause only exists if you do something seriously wrong like commit a major crime, steal from your employer or do something intentionally harmful to the company.  If you were not fired, then go to steps 2 & 3 below. 2. Company Trade Secrets New York courts will not enforce a non-compete agreement against an employee unless the company has a legitimate interest to protect. In almost every case, the only possible legitimate interests are trade secrets. Therefore, your non-compete agreement is probably unenforceable unless you have access to your employer’s trade secrets.   Most people do not have access to trade secrets. For example, at the Coca Cola company, their trade secrets are the formulas for coke and other drinks, and they are closely guarded secrets.  If you do have access to trade secrets or confidential information, then go to step 4 below.  3. Unique Skillset Do you have unique or extraordinary skills? This step only covers doctors, famous singers, actors & athletes and nationally renowned experts. Very few people have to worry about this. Unless you are one of them, your non-compete will not be enforced.  4. Reasonable Geographic Scope Is the non-compete agreement reasonable in time and geographic scope?  This step only applies if you answered yes to step 2 or 3 above. Generally, a non-compete will be deemed reasonable if the restriction is limited to a year or less but that can vary. An agreement is reasonable in geographic scope if it covers the company’s service area or market.  For example, if you are a doctor who works for a medical practice that serves Brooklyn, then the non-compete should only cover Brooklyn. Or if you work for Google, most of their products have global reach so a non-compete with Google could cover the globe.  Summing it Up Those are the four steps. If you answered yes to the first step or no to steps two and three, then your non-compete is unenforceable. These rules only apply to New York cases because other states have different rules.  If you need help with a non-compete agreement or want to learn more about New York Non- Compete Core Concepts, please contact us.  

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Non Compete Agreements

The “Choice of Law” in Non-Compete Disputes

The “choice of law” in a non-compete dispute can impact the outcome of the case.  New York, Massachusetts, and California, for example, have highly developed laws that favor employee mobility.  Other states might be more inclined to enforce a non-compete agreement according to its terms.  Therefore the question of which law applies can be determinative.  Employers often try to avoid the employee friend laws of states like California by inserting a “choice of law” provision in the agreement.  This happened to Patrick Miles who served as Vice Chairman of the Board of NuVasive, Inc., a medical device company based in San Diego and incorporated in Delaware.  Even though NuVasive was based in California, Mr. Miles’s non-compete agreement provided that Delaware law would apply.  Mr. Miles left NuVasive in October 2017 and joined a competitor. NuVasive sued Mr. Miles in Delaware and the question in the case, as eventually posed by the court, was whether the choice of law provision was included for the purpose of “importing [Delaware’s] well-developed body of commercial law” into the agreement or “as an attempt to contract around a fundamental public policy” of California against restraints on trade in the form of non-compete and non-solicitation clauses in the employment contract.  NuVasive, Inc. v. Miles (Del. Ch. Ct. August 26, 2019).  The court noted that Delaware generally respects parties’ choice of law provisions in contracts disputes.  However, because Delaware follows the Restatement (Second) of Conflicts of Law, the existence of a Delaware choice of law clause does not portend the end of the story.  Rather, Delaware will adopt and apply another jurisdiction’s law when the following test is satisfied:  The other jurisdiction’s law would apply absent the contractual choice of Delaware law,   Failure to apply the other jurisdiction’s law would frustrate a fundamental policy of the other jurisdiction, and   The other jurisdiction’s interest materially outweighs Delaware’s interest in the matter.  The court concluded that California law would apply since it was the state with the “strongest contacts to the contract.”    The court further found, consistent with its prior decision in Ascension Insurance Holdings, LLC v. Underwood (Del. Ch. Jan. 28, 2015) and citing California Business and Professions Code section 16600, that non-compete provisions are fundamentally against California policy.  The only exception – for a non-compete covenant in connection with the sale of a business – that California makes to its section 16600 prohibition against contracts in restraint of trade is also set forth in the statute.      The court noted that since its Ascension decision, California had added, in 2016, a new section to its labor code that only served to strengthen its already strong statement of public policy against non-competes.  This law provided that:  An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following: (1) Require the employee to adjudicate outside of California a claim arising in California. (2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.  Under this section of the California Labor Code, any provision of a contract that violates the above provision is voidable by the employee unless the employee has legal representation during negotiation of the forum or choice of law clause.  In Ascension, the Delaware court had held that “California’s specific interest [in its public policy against restraints of trade] is materially greater than Delaware’s general interest in the sanctity of a contract that has no relationship” to Delaware.   Similarly, the NuVasive court held in favor of Miles, concluding, for the non-solicitation clauses as well as the non-compete covenants, that California’s public policy was “sufficiently strong that it must not be ‘diluted by judicial fiat,’” and, therefore, substantially outweighed Delaware’s general interest in freedom of contract.    The lesson here is that the choice of law provision in a non-compete agreement should be ignored in these situations.   The law of the state with the greater interest typically should apply and that is the state where the executive works.  If the executive works in New York, for example, then New York law should apply.

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Non Compete Agreements

New York Non-Compete: The Legitimate Interests Test

Decided almost a half century ago, Reed, Roberts Assoc. v Strauman, 40 N.Y.2d 303 (N.Y. 1976), remains a pillar of New York case law when determining if a non-compete is enforceable. With this decision, New York State’s highest court established a framework for determining whether a non-compete (or any other restrictive covenant) is “reasonable” and, therefore, enforceable. Background In this case, the employer, Reed, Roberts Associates, Inc. (“Reed Roberts” and, sometimes, “the company”), provided advice and guidance to employers with respect to their obligations under New York State unemployment laws. The company’s expertise also extended to advising their clients in the areas of worker’s compensation, disability benefits, and pension plans. By 1976, Reed Roberts boasted over 6,000 customers, 21 offices nationwide, and gross sales of almost $4 million. In 1962, Reed Roberts hired John Strauman. As part of his employment contract, Mr. Strauman agreed to two restrictive covenants: a non-solicitation covenant and a non-compete covenant. The non-solicitation covenant provided that Mr. Strauman would never solicit any of Reed Roberts’ clients. The non-compete provided that Mr. Strauman would not, for a period of three years from the date of his termination of employment, engage in or have an interest in any business of the same type as Reed Roberts, provided such business was located within the City of New York or the counties of Nassau, Suffolk and Westchester. During his 11-year tenure with Reed Roberts, Mr. Strauman became a valuable employee and received three promotions, eventually rising to the position of senior vice-president in charge of operations. A key employee, Mr. Strauman was both responsible for formulating company policy and instrumental in devising most of the forms utilized by the company in rendering its services and in setting up its computer system. “Importantly, however, he was not responsible for sales or obtaining new customers.” Reed, Roberts Assoc. v Strauman, 40 N.Y.2d 303 (N.Y. 1976) p. 306. In 1973, Mr. Strauman left Reed Roberts and started his own company, Curator Associates, in direct competition with his former employer. Curator Associates was located in the same municipality as Reed Roberts, a geographical area specifically covered by the non-compete covenant that Mr. Strauman had signed in 1962. Reed Roberts brought a lawsuit against John Strauman and Curator Associates alleging that Strauman had been soliciting their customers and requesting that the court enforce the non-compete and non-solicitation covenants. Specifically, Reed Roberts requested relief via a court-issued injunction prohibiting Mr. Strauman and Curator Associates from (a) engaging in the business of unemployment tax control within the New York City metropolitan area for a period of three years, and (b) soliciting any of Reed Roberts’ customers permanently. Rules for Evaluating Restrictive Covenants Under New York State law, generally, restrictive covenants such as non-compete and non-solicitation provisions are enforceable only to the extent that they are reasonable. Whether or not a provision is determined to be “reasonable” differs based on context. In Reed, Roberts Assoc. v Strauman, the New York Court of Appeals outlined a framework for determining whether a restrictive covenant is “reasonable” (and therefore enforceable) under New York law. Reasonableness Framework for Restrictive Covenants In the employment context, restrictive covenants (such as non-competes) will only be considered reasonable and therefore enforceable to the extent that such provisions are: reasonable in time and geographic area; necessary to protect the employer’s legitimate interests; not harmful to the general public; and not unreasonably burdensome to the employee. In addition to considering the above framework for determining reasonableness, New York courts are more inclined to find that a restrictive covenant is reasonable if the facts show that there has been a conspiracy or breach of trust by the employee that results in commercial piracy. When is a Non-Compete Necessary to Protect an Employer’s “Legitimate Interests”? Focusing on the second prong of the reasonableness framework described above, the New York Court of Appeals set forth the following two-part test for determining whether a restrictive covenant (such as a non-compete) is necessary to protect an employer’s legitimate interest. A restrictive covenant is necessary to protect an employer’s legitimate interests and enforceable on such grounds only: to the extent necessary to prevent the disclosure or use of an employer’s trade secrets or confidential customer information; or where an employee’s services are unique or extraordinary. When is a Non-Compete Not “Unreasonably Burdensome” to the Employee? Focusing on the fourth prong of the reasonableness framework, the New York Court of Appeals shed some light on when a non-compete might be considered unreasonably burdensome to the employee. According to the court, a restrictive covenant is unreasonably burdensome to an employee when it restrains the employee’s right to apply, to their best advantage, the skills and knowledge (including those techniques which are skillful variations of general processes known to the particular trade) acquired by the overall experience of any previous employment.Id.at p. 307. The Reed court also noted an exception for members of “the learned professions.”  The Court explained that a restrictive covenant  might not be unreasonably burdensome to such an employee, provided that the restrictive covenant is reasonable and such employee’s services are unique or extraordinary. Procedural History On the first issue, the trial court ruled against Reed Roberts, refusing to grant an injunction that would enforce the non-compete and prohibit Mr. Strauman and Curator Associates from engaging in its business. The trial court explained that an injunction was not appropriate because (a) there were no trade secrets involved and (b) Mr. Strauman’s services were not so unique or extraordinary (even though he was considered a “key employee”), and therefore the non-compete agreement was not reasonable and was therefore not enforceable. On the second issue, the trial court ruled in favor of Reed Roberts, granting an injunction to permanently prohibit Mr. Strauman and Curator Associates from soliciting Reed Roberts’ clients. The trial court reasoned that it would be unjust and unfair for Mr. Strauman to utilize his knowledge of Reed Roberts’ internal operations to solicit its clients. Upon appeal, the New York State Appellate Division affirmed the trial court’s decision on both issues. The decision was […]

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Employment Law Blog

Federal Ban on Non-compete Agreements—Is It Possible?

Non-compete agreements have the attention of congress.  A bipartisan effort to regulate non-compete agreements on a federal level was introduced in the U.S. Senate in October 2019 by Senators Chris Murphy (D-Conn.) and Todd Young (R-Ind.). Senate Bill 2614, the Workforce Mobility Act of 2019, proposes a near federal ban of all employee non-compete agreements, with limited exceptions for certain business transactions. The bill would have sweeping implications, but does it have any chance of becoming law?   Workforce Mobility Act Would Limit Noncompete Agreements  The Workforce Mobility Act (WMA) defines a “non-compete” agreement as any agreement between “a person and an individual performing work for the person” that restricts the individual, after the termination of the working relationship, from doing the following:  Working for another person for a period of time.  Working in a specified geographic area.  Working for another person similar to the individual’s work for the company.  The WMA generally prohibits the use of non-compete agreements, except in limited instances. The bill permits noncompete agreements in connection with the sale of a business, as part of the dissolution of a partnership (or buyout of a person’s partnership interest), or as part of a severance agreement with senior executives as part of the sale of a business (but the agreement is limited to 12 months and the employee must receive 12 months’ severance pay).   The WMA does not expressly prohibit non-solicitation agreements or non-disclosure agreements. Still, the definition of a “noncompete agreement” leaves open the possibility that these agreements may also be restricted. The bill does not prohibit agreements that prevent employees from sharing trade secrets.   The Federal Trade Commission and the Department of Labor would be responsible for enforcing the WMA. The bill does allow workers to file suits for violations of the WMA.   How the WMA Impacts Employees  Non-compete agreements limit employee mobility, stifle wage growth and innovation, and prevent true competition. An estimated 40 percent of American workers have been subject to a non-compete agreement at some point in their careers. Given the growing use of these agreements in today’s workforce, even with employees in low-paying jobs, the harm imposed on the economy and workers has not gone unnoticed.   A prohibition on non-compete agreements would force companies to find a new way to protect their company’s legitimate interests without impeding a person’s ability to change jobs and earn higher wages. Passage of the WMA would also provide a uniform standard, which would ease the current discrepancies between states.  Does the Workforce Mobility Act Have a Chance?   The WMA is not the first attempt by legislators to regulate the use of non-compete agreements. Similar federal efforts failed in 2018 and January 2019, and many states have proposed or enacted legislation to limit the use of non–compete agreements.   While the WMA received praise from many, its future seems uncertain, and some critics argue that safeguards against employer abuse of non-compete agreements already exist in the court system and that the bill goes too far. A hearing was held in November 2019, but there has been no movement since that time. While passage of the bill may be unlikely, it has again brought the issue of abuse of non-competes to the forefront and may be a good step towards negotiating a compromise bill.  The Ottinger Employment Attorneys have drafted, reviewed, and negotiated non-compete agreements for over 20 years. Non-compete agreements can ruin your future career prospects, so it is critical that you carefully review and consider the long-term implications of these agreements. If you are contemplating entering into a non-compete agreement or fighting enforcement of an agreement, contact us today.  Click here for more about non-compete agreements in New York. 

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Employment Law Blog

Study Finds that Non-Compete Agreements are Bad for Employees and the Economy

A recent report released by the Economic Policy Institute (“EPI”) is arguing in favor of prohibiting noncompete agreements after concluding that the increasing use of noncompete agreements may be contributing to rising wage inequality, stagnant wages, and decreasing job mobility. Relying on data from a national survey of private-sector businesses, EPI found that almost half of responding establishments required at least some of their employees to sign noncompete agreements. Should noncompete agreements be prohibited? Do they stifle competition? EPI certainly makes a strong argument, showing just how dangerous noncompetes can be for workers and the entire American workforce. The Growing Use and Abuse of Non-Compete Agreements Noncompete agreements are commonly found in employment agreements or as free-standing agreements, prohibit an employee from working for a competing business or starting their own competing business within a prescribed timeframe and within a specified geographical area. While their use was formerly limited to executives and other highly paid employees, the use of noncompete agreements has spread into all industries and to all levels of employees, including minimum wage employees and those working entry-level jobs.  As a result of employer overreach, some states have made significant efforts to eliminate or limit the enforceability of noncompete agreements. Labor Market Trends EPI began its report by highlighting two main trends in recent decades: (1) rising inequality and stagnant wages among all but highly paid employees; and (2) the decline in job mobility and other measures of labor market fluidity. While many factors influence these trends, evidence suggests that the increasing use of noncompete agreements may be part of the problem. In terms of wage growth, workers often change jobs for a pay increase; when noncompete agreements limit mobility and competition, wages remain unchanged. Since noncompetes prohibit a worker from starting their own business or taking another job, there is a decline in dynamism in the national labor market. In fact, EPI noted that enforceability of noncompetes reduces the formation of new firms by 12% and is associated with an 11% increase in the length of time a worker remains at their job. Indeed, noncompete agreements are inhibiting workers’ individual growth and impeding competition between organizations. Key Findings about Non-Compete Agreements The EPI study made several notable findings that supported its conclusion and argument for the prohibition of noncompete agreements. Almost half of businesses use noncompete agreements. Specifically, 49.4% of establishments reported that at least some of their employees were required to sign noncompetes; 31.8% of organizations indicated that all employees were required to enter into noncompetes (regardless of wages or duties). Based on the available data, EPI was able to estimate that 27.8% to 46.5% of private-sector workers are subject to noncompete agreements. Based on the assumption that there are 129.3 million people in the private-sector workforce, that means between 36 million and 60 million private-sector workers are subject to noncompetes. Mid-sized organizations are more likely to have all employees sign noncompete agreements. Establishments with 50 to 100 employees are less likely to use noncompete agreements than organizations with 100 or more employees. However, while larger organizations (1000 or more employees) are more likely to have legal counsel and sophisticated HR policies, mid-sized organizations (100–499 employees) are more likely to require all employees to sign noncompetes than both smaller and larger organizations. In the 12 largest states, 40% of establishments have at least some employees sign noncompete agreements. The EPI study reviewed the use of noncompete agreements in the 12 largest states (including California and New York) and found that 40% of organizations in these states use noncompete agreements with at least some of their employees. Shockingly, 45.1% of California establishments subject some of their employees to noncompete agreements even though noncompete agreements are unenforceable in that state. Why would California employers do this? They are relying on the fact that workers rarely challenge these agreements in court. The EPI study notes that employees’ fears of being sued and pressure from employers causes workers to stay in positions regardless of whether the noncompete agreement is enforceable. This lack of mobility leads to lower or stagnant wages, and it stifles creativity and the development of new companies, products, and ideas.  Significant use of noncompete agreements in business services and wholesale trades. Seventy percent of business services and wholesale trade organizations use noncompete agreements. These agreements are used less in transportation, education, health services, and leisure and hospitality establishments. Noncompete agreements used more frequently at higher-wage workplaces. While noncompete agreements are used more with higher-wage workplaces than lower-wage workplaces, 29% of establishments where the average wage is less than $13.00 use noncompete agreements for all workers. Many opponents of noncompete agreements take issue with the use of noncompetes on lower wage earners arguing, in part, that organizations are not protecting legitimate business interests by limiting employment options for entry-level and lower-wage employees. Higher use of noncompete agreements with employees with higher education levels. Noncompete agreements are used more frequently with workers with higher education levels, especially in organizations where employees usually have a four-year college degree or higher. In addition, 45% of establishments where the typical education level is a college degree or higher used noncompete agreements for all employees. Lastly, in 27.1% of organizations where the typical employee has only a high school diploma, noncompetes are used for all workers. Employers requiring mandatory arbitration are more likely to use noncompete agreements. More than half (53.9%) of establishments have mandatory arbitration procedures. EPI concluded that employers using mandatory arbitration are more likely to use noncompete agreements. Advocating to Ban or Limit Non-Compete Agreements In 2019, the Workforce Mobility Act of 2019 [hyperlink to blog post on this Act] was introduced in the United States Senate, which would prohibit the use of noncompete agreements on a federal level; this bill is unlikely to pass. Regardless, many states have enacted their own legislation to address abuses of noncompete agreements, but this can be confusing and cumbersome for employers working in multiple states. In addition to legislation, the EPI suggested the Federal Trade Commission […]

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Non Compete Agreements

Why Not Blue Pencil?

“Blue penciling” refers to the convention whereby a court may exercise its discretion to modify parts of a contract that violate public policy, and which are, therefore, void.  In the employment context, the questions whether, when and how much blue-penciling is warranted come up most frequently when courts are asked to enforce restrictive covenants such as non-compete and nonsolicitation agreements.    A decision last year in the Colorado Court of Appeals, 23 LTD v. Herman, illuminates why some courts have retreated from “blue penciling.”  2019 Colo. App. 113, No. 18CA0950.    Ms. Herman Solicits a Customer In the Colorado case, the company, 23 LTD, doing business as Bradsby Group, sued a former employee, Tracy Herman, for breach of non-compete and nonsolicitation sections of her employment agreement.    Herman had been hired by Bradsby as a legal recruiter.  She had signed an employment agreement stating that she would not become for “twelve (12) months from the date of termination of employment … an owner, partner, investor, or shareholder in any entity that competes with Bradsby” within a restricted area.  The restricted area was defined as any place within thirty miles of Bradsby’s principal place of business, which was located in downtown Denver.  The agreement also included a nonsolicitation provision restricting Herman from contacting any person or entity who had had any contact with Bradsby during Herman’s last twelve months of employment with them.  At the conclusion of her employment with Bradsby, Herman formed her own company, obtaining and designating a mailing address for it at a location outside the restricted area.  She later reached out to a former job applicant from her time at Bradsby to inquire whether anyone in the contact’s network might be interested in a position she was recruiting to fill.  The contact had been previously offered a position with a law firm client of Bradsby’s but had turned it down.  When Herman contacted him later, he asked whether that law firm job might still be open.  Herman then communicated with the law firm. The contact was eventually hired by the law firm, and Herman collected a fee from the hiring firm. A One Dollar Verdict At trial, a jury decided that Herman had not violated the non-compete provisions of the agreement but that she had violated the nonsolicitation provision.  The jury awarded damages to Bradsby of one dollar.  However, the district court set aside that verdict because it found the nonsolicitation provision of the contract to be so broad as to be void and in violation of Colorado law.  The district court also declined to “blue pencil” the nonsolicitation provision to make it enforceable.    Upon appeal, Bradsby argued that the district court erred and/or abused its discretion in declining to blue-pencil the nonsolicitation provision.  Bradsby argued that the severability clause in its agreement obligated the district court to blue-pencil the agreement to conform to Colorado law.  Stating that “Colorado law provides little guidance as to when, and to what extent, trial courts may blue pencil unreasonable non-compete provisions,” the court of appeals considered case law from other jurisdictions.   In discussing its reasoning, the court of appeals pointed out that even though a contract may grant a court the authority to modify an overly broad non-compete agreement, doing so would essentially require the court to rewrite an unlawful contract.  No Blue Penciling The court noted that other states’ courts had rejected the proposition that parties to a contract may delegate the responsibility to the court to draft language for them.  “We are firmly convinced that parties are not entitled to make an agreement, as these litigants have tried to do, that they will be bound by whatever contract the courts may make for them at some time in the future.”  Quoting Rector-Phillips-Morse, Inc. v. Vroman, 489 S.W.2d 1, 4 (Ark. 1973).  The court further explained that it is not itself a party to the contract.  The parties “have no power or authority to enlist the court as their agent.”  Thus, parties to a contract cannot “contractually obligate a court to blue pencil non-compete provisions that it determines to be unreasonable.”    “Fundamentally, it is the obligation of a party who has and wishes to protect, trade secrets to crafting contractual provisions that do so without violating the important public policies of [the] state.  That responsibility does not fall on the shoulders of judges.” Citing Rector-Phillips-Morse, Inc. v. Vroman, 489 S.W.2d at 4; Bayly, Martin & Fay, Inc. v. Pickard, 780 P.2d 1168, 1175 (Okla. 1989).   Accordingly, the court of appeals held that “it is not the function of a court to write or rewrite contracts for parties to enable enforcement of a contract that, as written, violates the public policy of the state.”  While a court may elect to blue pencil “an otherwise offensive restrictive covenant,” the trial court “has broad discretion whether and when to exercise that authority.”

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Employment Law Blog

Non-Compete Trends Favor Executive Mobility

An encouraging new trend we have seen lately is more states enacting laws or enhancing existing laws that limit the enforceability of non-compete clauses.  The specific laws that apply to non-compete clauses in employment contracts vary greatly from one state to another.  While some of the basic law around this area is outlined in court opinions — or “case law” — there are also legislatively enacted laws that affect what is and isn’t allowed in different states.  This year, Utah, Idaho, and Colorado joined recent moves by California and Illinois to strengthen laws covering an employee’s right to switch employers.  Meanwhile, case law around non-compete clauses also continues to develop. Non-compete clauses can take many forms.  Generally speaking, a non-compete clause is a provision that restricts an employee from directly competing with the employer while in the employment relationship, from accepting later employment with a competitor of the employer or from going into business against the employer after the employment relationship has ended.  A non-compete provision may cover only a short period after employment, or it may last many years.  Non-compete agreements may or may not include provisions against “poaching” one’s colleagues (known as “non-solicitation” clauses).  Geographically, they may be limited in scope to a particular neighborhood, town or city, or they may reach across an entire state or region.  They may only encompass the employer’s existing clientele, or they may broadly restrict employment by the employee within an entire industry.  Indeed, where these lines are drawn in a particular non-compete clause can determine whether or not the clause is considered legal and enforceable or null and void. Employers are, of course, fond of non-compete clauses because they perceive them as protecting competitive advantages and trade secrets while supporting workforce stability. For employees, though, non-compete clauses can have drastic and lasting effects on their ability to earn a living.  And, for society in general, the impacts of non-competition agreements can be significant.  Since they restrict people’s ability to switch jobs easily, taking their accumulated expertise and knowledge with them, they impact social and geographical mobility as well as wage and salary growth. It is conceivable that left entirely unfettered, they could hurt innovation across whole industries. Thus, like other restraints on free-trade and competition, there are limits to what various jurisdictions — and the courts — consider acceptable in a non-compete clause.   Here are some recent developments: This spring, Utah enacted a new law to limit the reach of non-compete agreements in the broadcasting industry. This law adds more strength to a bill they enacted two years ago.  The two-year-old law in Utah imposed, in general, a one-year post-employment time limit on non-compete agreements.  With this new law, employers in the broadcasting industry may not impose non-compete agreements on employees making a salary of less than $47,476 annually.  Nor may they enforce a non-compete provision against an employee who was not terminated for cause unless the employee breached their employment contract. Also this spring, Idaho moved to repeal a burdensome requirement it had enacted two years ago which required employees to prove that their change of employers did not irreparably harm their former employer. With Idaho’s repeal of Idaho Code Section 44-2704(6), the burden is once again on the former employer to show a likelihood of irreparable harm before a court may issue an injunction against the employee’s new employment. In Colorado, the legislature passed a law that allows physicians to continue treating patients with “rare disorders” even when that would otherwise constitute a violation of the physician’s non-compete agreement. This serves to clarify Colorado’s existing law which generally prohibited non-compete agreements except in certain specific cases, such as for protection of trade secrets. In addition to these statutory changes, we’ve also seen recent case law affecting non-compete agreements: In Wisconsin, non-compete clauses are governed by Wisconsin Statute 103.465. In  Wisconsin, to be enforceable, the statute requires that a non-compete covenant must be “reasonably necessary for the protection of the employer,” only cover a reasonable period, only cover a reasonable territory and not be an unreasonable restraint on employees.  In January this year, the Wisconsin Supreme Court held, in Manitowoc v. Lanning, that this statute, which generally refers to “covenants not to compete,” also applies to non-solicitation agreements that would prevent employees from soliciting, inducing or encouraging other employees to terminate employment with one employer to accept employment with a competitor.  The court found that the statute applies to all such covenants that are restraints of trade, regardless of whether they specifically include the term “compete” in their label. Last but not least, the South Dakota Supreme court decided a case in March of 2018 entitled Farm Bureau Life Insurance v. Dolly. In that case, the court declined to enforce a non-compete clause.  The clause would have prevented a former insurance salesman from selling insurance to any of Farm Bureau’s former customers, even though the former customers had approached him and he had not actually reached out to the customers or otherwise solicited them for their business.  The court held that “an agreement not to solicit — rather than not to sell to — an insurer’s existing customers [was] the only reasonable interpretation of [South Dakota Codified Laws 53-9-12].”    The court concluded by stating, “The general rule against contracts in restraint of a lawful profession, trade, or business is a legislative expression of public policy….”

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Employment Law Blog

The Janitor Rule Mops Up Another Non-Compete Agreement

The Janitor Rule is a tool used to invalidate non-compete agreements.  This rule, also known as the “janitor analogy,” applies to non-compete agreements that are so broad that they would bar employees from even working as a janitor at another company.  In other words, the non-compete agreement prohibits employment or affiliation with a competitor in any capacity. While non-compete agreements are permitted to protect employers’ interests, they cannot be unreasonably burdensome on employees or so overbroad as to prevent the employee from working in any job, even an unrelated job, with a competitor. Such an agreement would not be protecting the employer’s legitimate business interests. An Illinois federal district court recently relied upon the Janitor Rule to invalidate an overbroad non-compete agreement.   The court concluded that Medix Staffing Solutions, Inc.’s non-compete agreement with a former director was so broad that it was unreasonable on its face and unenforceable. Med Medix Staffing Solutions, Inc. v. Dumrauf, No. 17-C-6648 (N.D. Ill. Apr. 17, 2018).  The court dismissed the case noting it was an extreme case and the judge even refused to modify the agreement because the non-compete agreement was so overbroad. Background Daniel Dumrauf was a director at Medix responsible for sales and recruiting strategy in the pharmaceutical, biotechnology, and medical device industries. He entered into a non-compete agreement prohibiting him from gaining employment by any company that worked in the same field as Medix within 50 miles of the Medix office in Scottsdale, Arizona. The non-compete agreement also applied to companies that are not competitors of Medix.  In August 2017, Dumrauf resigned from his position at Medix and accepted a position with ProLink Staffing overseeing its Healthcare Division’s operations. While Dumrauf alleged that 90 percent of his activities with ProLink would take place in Ohio and Kentucky, he occasionally worked from ProLink’s office in Arizona, which would be a violation of his non-compete agreement with Medix. Medix filed suit alleging breach of contract claims.   Dumrauf filed a motion to dismiss the case arguing the non-compete agreement was so overbroad that it would prevent him from performing any services for a company that worked in the same field as Medix, even if it did not relate to his prior role at Medix. The Janitor Rule One argument raised by Dumrauf was that the non-compete agreement violated the “janitor rule.” In this case, the court concluded that while Dumrauf’s argument that he would be prevented from even working as a janitor at another company was “a bit far-fetched, the Court sees no language in the [non-compete agreement] that makes it an inaccurate statement of its prohibitions.” The court explained that the non-compete agreement would prevent him from not only taking plausible jobs at another company but any jobs for any company in the same business as Medix. The non-compete agreement was unenforceable, and the court refused to modify the agreement because “where it involves a covenant not to compete whose provisions are so broad as to be a ban on competition per se, courts should refuse to enforce or modify the agreement.” Takeaways The Janitor Rule can be a powerful tool for employees as a defense against overbroad non-compete agreements. Also, the rule can be useful for employers as a guide when drafting non-compete agreements. Employers should carefully examine their non-compete provisions to ensure they are not prohibiting former employees from working for a competitor, or any company in their field, in any capacity or manner. A one-size fits all agreement may not be appropriate for all situations. Non-compete agreements are disfavored, and many New York judges and the New York Attorney General recognize the importance of limiting non-compete agreements.  New York non-compete agreements must be narrowly tailored and reasonably limited in time and geographic scope, as well as justified by a company’s legitimate business interests. While there may be tactics to beat your non-compete agreement, non-compete agreements may be enforced and need to be taken seriously.   If you are contemplating a non-compete agreement or currently bound by one, you should get a non-compete Review & Consultation.  The Ottinger Firm will review your non-compete agreement and meet with you to go over it and discuss your options. We have litigated non-compete agreements in federal and state court and mediated, arbitrated and negotiated hundreds of non-compete disputes. For more information contact our non-compete attorneys at 347-492-1904.

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Employment Law Blog

New York Non Compete Agreements Can Shackle Your Career

Historically, New York non compete agreements have been used to protect narrow and legitimate interests. For instance, a non-compete clause might limit the ability of high-level executives with access to trade secrets to use that information to a company’s disadvantage.  Or a non-compete agreement might allow a company to sideline a former employee with deep customer relationships for a period of time to give the company an opportunity to retain those clients after the employee’s departure. Over the past decade, however, the use of New York non compete agreements has expanded exponentially, such that they are standard procedure in almost every industry. See the Market Watch article (More Firm’s Requiring Non-Compete Agreements), Wall Street Journal article (Litigation Over Non complete Clauses Is Rising).  Despite this expansion, however, the enforceability of broad or abusive New York non compete agreements remains in question, as New York courts are more skeptical of non-compete agreements than courts in almost any other jurisdiction. As such, it is crucial for both companies and employees to remain aware of the broad principles of law governing New York non compete agreements. Of course, companies must balance their need for broad protections with the potential that their agreements will be found to be unenforceable. Employees, on the other hand, may use their awareness of the legal principles governing New York non compete agreements as leverage in negotiations prior to signing a contract, or perhaps as a way out of an agreement if the relationship has broken down. New York Non Compete Agreements May Only Protect a Company’s Legitimate Business Interests A New York non compete agreement must be justified by a company’s legitimate business interests. Specifically, there are two interests that courts in New York recognize as “legitimate”: a non-compete agreement is valid only if it protects trade secrets or customer or client relationships. Unfortunately non-compete agreements are often abused for other, illegitimate purposes, such as preventing employees from resigning without penalty. To the extent a company attempts to enforce its non-compete in this way, a court may find it to be unenforceable. New York Non Compete Agreements Cannot be Over-Broad Not only are New York non compete agreements restricted to those narrow interests, they must be narrowly tailored so that only those interests are protected. Specifically, non-compete agreements must be reasonably limited in time, geographic scope, and in the definition of competitive activity.  Regarding the geographic scope; an agreement can only prohibit competitive activity in an area that the company operates in. Traditionally, these limitations were quite narrow, but with increasing numbers of companies doing business solely online, national or even global non-competes are becoming more common.  In such cases, however, the definition of competitive activity must be carefully circumscribed. For instance, an employer only engages in a certain type of business, the non-compete agreement might be invalidated or narrowed if it prohibits the employee from engaging in other lines of work.  Finally, with respect to temporal limitations, non-compete agreements are generally (though not always) acceptable if they are limited to one year or less, but generally should not exceed that time. New York Non Compete Agreements May Be Unenforceable If the Employee Was Terminated Without Cause or If the Employer Breached The Contract In New York, courts often will not enforce a non-compete agreement against and employee who was terminated without cause.  The concept is simple—the enforceability of non-compete agreements depends on a mutuality of benefit. In other words, a company that is no longer willing to employ an employee cannot prevent that employee from working anywhere else. The law on this subject is developing, however, and we will cover this issue in more detail in a later post. Along the same lines, a company cannot enforce an non-compete agreement that is contained in a broader contract that the company has breached itself.  As such, employees may be able to void a non-compete agreement entirely if they can prove that their employer breached another part of the employment contract, by, for instance failing to pay full compensation or provide required notice before a termination. Click here for more on NY non compete agreements. If you need help dealing with a New York non compete agreement, please contact us.

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Employment Law Blog

Non-Compete Agreements are Bad for Business

As you may know, New York and most other states do not prohibit non-compete agreements. In fact, NY courts will enforce these agreements. In California, non-compete agreements have been prohibited since 1850 and many believe that this policy has contributed to the growth of California’s economy and especially so in the technology field. A while back, the National Law Journal ran an article by Richard A. Booth that suggests that California’s law against non-compete agreements may actually be good for business – especially the technology business. Mr. Booth argues that without non-compete agreements, companies are forced to retain quality employees with equity or other inducements. He also argues that with out the shackles of non-compete agreements, good employees are free to leave less productive companies at will. He suggests that this freedom of movement creates a more efficient marketplace and allows the best employees to be drawn to the best companies. In New York, by contrast, good employees get trapped with bad companies by non-compete agreements and this hinders growth as human resources get stuck in poorly run companies. The net effect of non-compete agreements is that employees lose the ability to move and the economy is handicapped. Companies can tie up human resources with non-compete agreements. In my opinion, New York should change its ways and stop letting companies hamper the market place with non-compete agreements.

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