Given recent developments and trends in the United States relating to restricted covenants (especially non-competes), companies should take another look at any restrictive covenants included in equity award agreements.
To learn more about the possible approaches companies can take to deal with restrictive covenants for employees outside the United States, read our recent NASPP guest blog post.
Continue Reading Reevaluating Restrictive Covenants in Equity Award Agreements
Special thanks to Maura Ann McBreen.
The short answer is “no.”
Typically the enforceability of non-compete clauses has been subject to state law and more recently, many states have imposed limitations on the enforceability of non-competes. Some states, like California, North Dakota and Oklahoma, ban them entirely. However, the Federal Trade Commission (FTC) on January 5, 2023 issued a proposed rule that would significantly restrict the use of non-compete clauses between employers and employees as a matter of federal law. The FTC said that the proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also generally prohibit employers from using non-compete clauses and make it illegal for an employer to:
The proposed rule would generally not apply to other types of employment restrictions, like non-solicitation and non-disclosure agreements, unless such other employment restrictions were so broad as to function like non-competes. Since this function test is clearly open to interpretation, the reach of the proposed rule may be further expanded.
Across the world, trade secrets are becoming increasingly important. As companies align workforce transformation, manage supply chain operations and balance the needs of their digital transformation journey, new strategies are required for the identification, protection and enforcement of their most valuable, complex and market-differentiating trade secrets.
In this series of bite-sized videos, hear from Baker
Nondisparagement clauses have long been a staple in settlement agreements between employers and employees as a way to discourage disgruntled employees from debasing the company after they have departed. Nondisparagement clauses often require employees to refrain from saying anything negative about their former employer at all. But employers should keep a few things in mind to ensure that the use of a nondisparagement clause does not create additional risk for the company.
The NLRB has signaled it may revisit current Board precedent holding nondisparagement agreements in employee settlement agreements are legal-meaning employers should watch out for Board action or decisions reverting to restrictions on nondisparagement agreements. On August 12, 2021, in her first memo as NLRB General Counsel, Jennifer Abruzzo issued a Mandatory Submissions to Advice Memorandum, setting forth that NLRB Regional Directors, Officers-in-Charge, and Resident Officers must submit certain types of cases to the NLRB Division of Advice (“Advice”) (which, in addition to other duties, provides guidance to the NLRB’s Regional Offices regarding difficult and novel issues arising in the processing of unfair labor practice charges).
Abruzzo identified 11 areas of Board case law involving doctrinal shifts from previous Board precedent that the Board, through submissions to Advice, would be examining-including “cases finding that separation agreements that contain…nondisparagement clauses…lawful.”
Abruzzo highlighted cases involving the applicability of Baylor University Medical Center, 369 NLRB No. 43 (2020), overruling Clark Distribution Systems, 336 NLRB 747 (2001), and International Game Technology, 370 NLRB No. 50 (2020) to be submitted to Advice for review.
Before it was overruled, Clark Distribution Systems stated that a provision in the confidentiality clause of a severance agreement prohibiting the employee from voluntarily appearing as a witness, voluntarily providing documents or information, or otherwise assisting in the prosecution of any claims against the company unlawfully chilled the employees’ Section 7 rights under the National Labor Relations Act (NLRA)(which guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection,” as well as the right “to refrain from any or all such activities.”)
The provisions at issue in the severance agreements in Baylor University Medical Center included a “No Participation in Claims” provision in which the departing employee agreed not to assist or participate in any claim brought by a third party against Baylor (unless compelled by law to do so), and a “Confidentiality” provision in which the employee agreed to keep confidential any of Baylor’s confidential information made known to the employee during their employment. The complainants alleged that by offering the severance agreements with these provisions, Baylor violated Section 8(a)(1) of the NLRA (which makes it an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in Section 7” of the Act). The Board disagreed, in part because the severance agreement only pertained to postemployment activities having no impact on terms and conditions of employment. The Board also found that Baylor’s mere offer of the separation agreement was not coercive or otherwise unlawful, and that there was no sign that the agreement was offered under circumstances that would tend to infringe on the separating employees’ exercise of their own or their co-workers’ Section 7 rights.
International Game Technology (IGT) applied Baylor to a separation agreement with a nondisparagement clause, finding in that case that the severance agreement at issue was entirely voluntary, did not affect pay or benefits that were established as terms of employment, and was not offered coercively-and the nondisparagement provision did not tend to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights under the Act.
What should employers do now given the NLRB review of cases applying Baylor and International Game Technology to ensure they don’t run afoul of the NLRA when using nondisparagement clauses in settlement agreements with employees? Employers should:
New state and federal limits on post-employment restrictive covenants mean employers must stay on top of more than just vaccination policies or the logistics of office reopenings. The swath of new and on-the-horizon legislation aimed at limiting the enforceability of post-employment non-compete agreements deserves employers’ attention too. Part One of our blog post series on restrictive covenants addressed the intersection of remote work and state non-compete laws. Now, in Part Two, we summarize recent updates to state non-compete laws, pending state legislation that could impact non-competes, and new federal-level activity aimed at limiting non-competes.
Colorado recently raised the stakes for violations of its non-compete law. Effective March 1, 2022, under SB 21-271, a person who violates Colorado’s non-compete statute commits a class 2 misdemeanor.
Colorado’s non-compete statute (C.R.S. section 8-2-113) voids agreements that restrict trade, such as non-competition and non-solicitation of customers covenants, unless they fall within a specific statutory exception: (i) a contract for the purchase or sale of a business or its assets; (ii) a contract for protecting trade secrets; (iii) a contract provision recovering education or training expenses associated with an employee who has been with an employer for less than two years; or (iv) a restriction on executive or management personnel or each of their professional staff. As of March 1, 2022, a person who violates this statute commits a class 2 misdemeanor punishable by up to 120 days in jail and / or a fine of up to $750.
Many questions remain about the enforcement of this amendment, such as who will face ultimate liability for the employer (e.g., in-house counsel, HR staff, line managers, etc.). And though there is no indication that the new law is retroactive, Colorado employers were subject to criminal penalties for a violation of Colorado’s non-compete law even prior to SB 21-271 being passed, under C.R.S. section 8-2-115. SB 21-271 repealed C.R.S. section 8-2-115 while simultaneously inserting language into the non-compete statute itself making a violation a class 2 misdemeanor. It remains to be seen whether this is simple statutory consolidation, or a signal that Colorado plans to increase enforcement of violations of its non-compete statute. Employers should review their non-compete agreements and internal policies regarding which employees are required to sign such agreements to make sure they are in compliance with this new law.
The writing is on the wall: remote work is here to stay. According to data collected by Ladders, three million professional jobs in the US went permanently remote in the fourth quarter 2021 alone. By the end of 2021, 18 percent of all professional jobs in the US were remote. Ladders projects that number will be close to 25 percent by the end of 2022. Of course, this leaves employment lawyers and HR professionals wondering — what employment laws apply to our distributed workforce?
One particularly thorny issue facing employers in this context is the permissibility of post-termination non-competition agreements. Non-compete laws and their requirements differ greatly from state to state. For example, in Illinois, one of the requirements is that the employee must earn at least $75,000 annually in order to enter into an enforceable post-termination non-compete, but in Oregon, that minimum annual income threshold increases to $100,533 — and that same employee would be subject to no income threshold if Missouri law applied. On the other hand, in Colorado, where post-termination non-competes are generally unlawful, the employer could soon face misdemeanor criminal liability for seeking to enforce an unlawful post-termination non-compete against any employee, and in California, the employer could be exposed to compensatory and punitive damages if a claim is accompanied by other deemed tortious conduct (e.g., interference with the employee’s future employment prospects by seeking to enforce the unlawful agreement).
In this post, we analyze how remote work further muddles the already complicated landscape of post-termination non-competes and how employers can best navigate this complex backdrop.
One issue arising out of remote work is knowing what state’s law will apply when it comes to the enforceability of non-compete restrictions. With remote work, long gone are the days where an employer can be relatively certain that the state where an employee is located at the beginning of the employment relationship will be the same state that employee is living and working in at the end of the employment relationship. As a result, when the need to enforce non-compete restrictions arises, the parties may dispute what state’s law should apply to the non-compete (e.g., the state where the employee was located when they entered into the contract, the state where the employee began work for the employer, or the state whether the employee was living or working at the end of the employment relationship).
Special thanks to Brian Wydajewski, Narendra Acharya, Aimee Soodan, Tulsi Karamchandani, Scott McMillen, Angelique Poret-Kahn, Ginger Partee, John Foerster and Matthew Gorman.
Our two-part webinar series, co-hosted by the Association of Corporate Counsel – Chicago Chapter, is designed to ensure that Midwest in-house counsel are up to
In part one of this article, we discussed when and how multinational companies can use a noncompetition agreement on their highly skilled employees to protect their confidential information and other intellectual property. In particular, we described five key factors to consider before rolling out noncompete covenants around the world.
In part two, we analyze how
As multinational companies compete for highly skilled employees around the world, they are often confronted with a deceptively simple question: Do they impose a noncompetition agreement on their employees?
This article is part one of a two-part article addressing how multinational companies can use a noncompetition agreement on their highly skilled employees to protect their
California courts mostly take a no prisoners approach to Business and Professions Code section 16600, the statute prohibiting illegal restraints on trade. Courts broadly interpret Section 16600, which states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void,” to invalidate most post-employment non-competes and customer non-solicits, including covenants preventing former employees or their new employers from “hiring” employees of a former employer (so-called “no hire agreements”). But Section 16600 does not bar all post-employment covenants–just those that “restrain” trade.
