Source: https://www.noncompetereport.com/
Timestamp: 2019-04-19 06:27:43+00:00

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Companies with questions about the enforceability of restrictive covenants in their jurisdictions are encouraged to contact a Jackson Lewis attorney for further guidance.
Do employees in New Jersey owe a duty of loyalty to employers, even without a written employment agreement? Eliminating any possible doubt, the New Jersey Appellate Division answered, emphatically, yes.
In Technology Dynamics, Inc. d/b/a Nova Battery Systems v. Emerging Power, Inc. et al., Docket No. A-0952-17T3 (N.J. Sup. Ct. – App. Div. Feb. 26, 2019), the Appellate Division reinstated breach of duty of loyalty claims against two former key employees of Nova Battery Systems (“NBS”), Master and Beringer, who resigned from NBS to work at competitor Emerging Power, Inc. (“EPI”). In an eleven-count complaint, NBS asserted a number of claims, including counts for breach of duty of loyalty and tortious interference with prospective business, and sought injunctive relief – which was denied.
Notably, Master and Beringer did not have any employment contract or non‑compete agreement with NBS. Consequently, at the conclusion of the discovery period, EPI moved for summary judgment, based partly on the contention that NBS’s claims could not survive the absence of a written contractual agreement. The trial court agreed and dismissed the complaint.
On appeal, NBS argued that a written agreement is not required in order to establish claims of breach of the duty of loyalty and tortious interference. The Appellate Division agreed and issued a twenty-five page opinion tracing the history of the duty of loyalty claim.
(4) the nature of the employee’s [conduct] and its effect on the employer.
Kaye v. Rosefielde, 223 N.J. 218, 230 (2015) (alteration in original) (citing Cameco, 157 N.J. at 521-22).
The Court noted that while the existence of a contract is a relevant factor to be considered in a breach of the duty of loyalty claim, it is not determinative. In reviewing the evidentiary record, the Court noted emails showing Master and Beringer intended to solicit their NBS customers while they were still employed by NBS. The emails further indicated that Master and Beringer planned to sell those customers an excess amount of NBS products before resigning their employment, so that the customers could manage any delays in servicing during the transition from NBS to EPI.
Therefore, relying on Lamorte – for the proposition that an employee may not breach the undivided duty of loyalty he or she owns to his or her employer while still employed by soliciting the employer’s customer or engaging in other acts of secret competition – the Appellate Division reversed the trial court decision and restored the breach of duty of loyalty and tortious interference counts of the Amended Complaint. This decision reminds us that breach of duty of loyalty claims are alive and well in New Jersey, and do not sink or swim on the existence of a written contract. Nevertheless, there are many reasons why an employer concerned about competition by former employees ought to use some form of restrictive covenant agreement.
Companies needing assistance in non-compete matters or drafting restrictive covenant agreements are encouraged to contact a Jackson Lewis attorney for related guidance.
Last year, Democrats in the United States Senate and House of Representatives introduced bills — S.2782 and H.R.5631 — banning non-compete agreements in the vast majority of workplaces across the country. Although those bills failed to gain traction, the authors of this Blog anticipated a renewed effort at federal non-compete reform in 2019, with Democrats taking control of the House in the November 2018 elections. Sure enough, the Federal Freedom to Compete Act (the “Act”) was introduced on January 15, 2019, but in a twist, the Act’s author is not a Democrat but rather Marco Rubio, Republican Senator from the State of Florida.
As explained on Senator Rubio’s website, the Act is focused on “entry-level, low-wage workers” and is designed to “empower these workers by preventing employers from using non-compete agreements in employment contracts.” Below, we take a closer look at the Act, including the types of agreements covered by the Act, as well as the scope of employees who would be subject to its protections.
What is a “non-compete agreement”?
As defined in the Act, a “non-compete agreement” means an agreement between an employer and employee “that restricts such employee from performing, after the employment relationship […] terminates …: (1) Any work for another employer for a specified period of time[;] (2) Any work in a specified geographical area[; or] (3) Any work for another employer that is similar to such employee’s work for the employer that is a party to such agreement.” In addition to this general definition, the Act expressly states that it does not preclude agreements that prohibit the disclosure of trade secrets.
First, while it is true that most non-competes are limited to a specified duration, geographic range, and type of work, that is not always the case. Interpreted in its most literal sense, the Act does not account for restraints on competition that, intentionally or not, fail to include such specifications. For instance, an agreement that simply prohibits an employee from subsequently working for a competing business, while potentially overbroad and unenforceable on other grounds, would fall outside of the above-referenced definition and, therefore, would theoretically avoid coverage under the Act. The creation of this loophole was presumably unintentional.
Second, by defining “non-compete agreements” to include agreements that restrict work “for another employer” for a specified duration or in a specified capacity, the Act seemingly fails to cover agreements that prevent an employee from competing in a capacity other than as an employee (e.g., where an employee forms a competing business or works for a competitor as an independent contractor). Again, this distinction was presumably unintentional.
Third, while the Act expressly disclaims coverage over agreements that prohibit the misappropriation of trade secrets, it is unclear whether it applies to the use of limited restraints on competition, such as covenants that prohibit the solicitation of employees, the solicitation of customers, or the disclosure of confidential information that does not qualify as a trade secret.
As mentioned above, the primary intent of the Act is to increase the economic freedom of “entry-level, low-wage workers.” In order to meet that goal, the Act initially imposes a broad prohibition on non-compete agreements for all employees. The Act then adds the caveat that the prohibition “shall not apply with respect to any employee described in [FLSA] section 13(a)(1)[,]” which includes exempt executive, administrative, professional, and outside sales employees who meet heightened wage requirements.
By allowing non-compete agreements only for exempt executive, administrative, professional, and outside sales employees, one could safely argue that the Act’s non-compete ban extends to employees who are neither “entry-level” nor “low-wage.” At the same time, the Act would prohibit the use of non-compete agreements with anyone who is paid on an hourly basis. Consequently, as the Act gets increased attention, there will likely be efforts from pro-business forces to narrow the scope of the ban.
In light of last year’s Democrat-led efforts to regulate non-compete agreements at the federal level, Senator Rubio’s submission of the Federal Freedom to Compete Act suggests a level of bipartisan support that was not previously apparent. We will continue to monitor the Act to determine the extent of that support. Employers with questions about the enforceability of their restrictive covenants are encouraged to contact a member of Jackson Lewis’s Non-Competes and Protection Against Unfair Competition Practice Group.
When implementing restrictive covenant agreements in their workforces, companies often grapple with how best to handle the wide variation in the law from one state to the other. One solution is to include a choice of law provision that calls for all agreements to be construed under the laws of a single state. Still, there is no guarantee that courts will honor a choice of law provision, particularly where the purpose of the agreement conflicts with the public policy interests of a different state that shares an interest in the subject matter at issue.
Twice in recent months, the Delaware Chancery Court addressed the enforceability of Delaware choice of law provisions in restrictive covenant agreements involving out-of-state employees. In Cabela’s LLC v. Wellman et al., Case No. 2018-0607-TMR (Oct. 26, 2018), the plaintiff, a Delaware corporation with headquarters in Nebraska, sued four former director-level employees from its Nebraska headquarters. Meanwhile, the plaintiff in NuVasive, Inc. v. Miles, Case No. 2017-0720-SG (Sept. 28, 2018) was also a Delaware corporation but with business operations in California, and was suing to enforce a non-compete agreement against a similarly high-level employee in California. In both Cabela’s and NuVasive, the defendant employees resided, worked, and ultimately sought to compete with their former employers in Nebraska and California, respectively. In other words, virtually all relevant activities at issue in the cases occurred outside of Delaware. Nevertheless, the plaintiff former employers asked the Court to enforce their agreements under Delaware law, based on their inclusion of Delaware choice of law provisions in the relevant agreements.
Would another state’s laws apply in the absence of a choice of law provision?
If so, would enforcing the non-compete covenant violate a fundamental public policy of that other state?
If so, are the other state’s applicable public policy interests materially greater than the applicable public policy interests of Delaware?
In Cabela’s, the Court found that Nebraska law would apply in the absence of the Delaware choice of law provision, given Nebraska’s stronger contacts with the agreements. Second, the Court concluded that the defendants’ agreements, which were broadly drafted to prohibit ordinary competition, violated Nebraska’s fundamental public policy, which strictly prohibits such agreements unless they are narrowly tailored to prevent misappropriation of customer goodwill, confidential information, or trade secrets. Third, the Court held that Nebraska’s specific public policy against restraints on trade was materially greater than Delaware’s general public policy interest in freedom of contract. As the Court explained, where the contract at issue “is abhorrent and void” under Nebraska public policy, “and where, as here, the formation and enforcement of the contract relate overwhelmingly to [Nebraska], a general interest in freedom of contract is unlikely to be the equal of that public policy[.]” On those grounds, the Court refused to honor the Delaware choice of law provision.
Applying the same criteria, the Delaware Chancery Court reached the opposite conclusion in the NuVasive decision. Just as the facts in Cabelo’s related overwhelmingly to Nebraska, the facts in NuVasive related just as strongly to California. Further, it is generally understood that California law prohibits restrictive covenant agreements broadly. Section 16600 of the California Business and Professional Code strictly prohibits all restraints on competition in the employment context. Further, Section 925 of the California Labor Code prohibits employers from implementing choice of law or choice of forum provisions that circumvent California’s statutory protections or restrict access to a California judicial forum. The Court noted that these provisions reflect strong public policies against the enforcement of non-compete agreements against California residents.
Nevertheless, the NuVasive Court ultimately approved the choice of Delaware law provision due to one important distinguishing factor – the former employee was represented by an attorney in the negotiation of the non-compete agreement. The Court noted that although California Labor Code Section 925 generally prohibits parties from contracting around California substantive laws and California judicial forums, it carves out an exception with respect to employees who are represented by their own legal counsel during the contract negotiations. That carve-out exception, the Court concluded, demonstrated the California Legislature’s recognition “that in the limited subset of cases where the inequality of bargaining strength of the parties to an employment contract is buffered by the employee being represented by independent counsel, and where counsel participated in negotiation of the terms of a choice of law provision, California’s interest in freedom of contract outweighs interest in freedom of employment.” On that basis, the Court held that enforcement of the Delaware choice of law provision would not violate a public policy interest held by California.
The above decisions make clear that Delaware’s public policies may be outweighed by the public policies of a state with a materially greater interest in the litigation. If enforcement of the contract in the manner requested would be abhorrent to the public policies of the latter state, then Delaware courts will not enforce a choice of law provision requiring application of Delaware law. In Cabelo’s and NuVasive, the Court found that Delaware had a lesser interest in the subject matter than Nebraska and California, respectively. However, while the Court also concluded that Nebraska’s interest in the Cabelo’s litigation overrode the parties’ contractually-designated choice of law provision, the same could not be said for California’s interest in the NuVasive litigation, given that the NuVasive defendant negotiated the choice of law provision with the assistance of legal counsel.
Ultimately, the validity of a choice of law provision in a restrictive covenant agreement depends on a number of factors, including the facts at issue as well as the public policies of states that may have a material interest in the subject matter. This analysis should be performed with the assistance of counsel. And, in certain instances, it may be wise for the company to recommend that its prospective employees retain counsel when negotiating their agreements.
Companies needing assistance in the drafting of restrictive covenant agreements are encouraged to contact a Jackson Lewis attorney for related guidance.
In the midst of a federal effort to ramp up antitrust prosecutions of companies agreeing not to recruit or hire each other’s employees (see previous articles dated November 9, 2016, January 25, 2018, April 25, 2018 and July 17, 2018), special scrutiny – and criticism – has been directed toward the use of no-poach agreements in the franchise industry. State Attorneys General now lead the fight to limit the practice, and early indications suggest that their efforts are already producing results.
On July 9, 2018, Attorneys General from 10 states and the District of Columbia launched a joint investigation into the hiring practices of certain national fast-food companies. In a letter sent to the companies, the Attorneys General requested information regarding restrictive covenant language included in the companies’ franchise agreements which would inhibit the ability of employees to move from one franchisee to another. According to the Attorneys General, such “no poach” agreements negatively restrict employees’ earning potential, and implicate state-based employee protection laws, as well as consumer protection and antitrust laws. Responses to the letter were due on August 6, 2018. As of the date of this post, there has been no official update on the status or content of any responses.
Since the joint investigation was announced, another state that did not join the initial letter revealed in two separate press releases that a number of franchises are already taking steps to curb the use of no-poach clauses in franchisee agreements. First, on July 12, 2018, the Attorney General for the State of Washington, Bob Ferguson, announced that following an investigation by its Antitrust Division, seven national fast-food companies agreed to no longer enforce such “no poach” agreements in their current franchise agreements, and to remove such language from future contracts. More recently, on August 20, 2018, AG Ferguson announced that eight more fast-food chains entered into similar agreements. According to both announcements, the concessions were made in order to avoid antitrust lawsuits by the State of Washington. Significantly, the announcements emphasized that the concessions would take effect not just in Washington but on a nation-wide basis.
In the franchise industry, the use of “no poach” agreements typically provide that the franchisee will not recruit or hire employees (often management employees exclusively) from other franchise locations of the same franchisor. The rationale for such language is to protect franchisees from having their management employees recruited away to other franchise locations after the franchisee expended time and money training such employees.
The state-level probes come on the heels of increased criticism of no-poach agreements by the Department of Justice’s Antitrust Division. While no court to date has found such agreements to violate federal antitrust laws, the DOJ has repeatedly warned that it will treat these types of agreements as illegal restraints of trade, in violation of the Sherman Act, if they are not reasonably tailored to support a broader, legitimate business collaboration.
In this vein, the DOJ has acted aggressively to rein in “no poach” agreements by obtaining civil consent agreements and threatening criminal prosecution against companies who enter into such agreements. There also has been a spike in private class action lawsuits, which are particularly enticing to the class action bar given the potential for a large number of class members, as well as the ability to recoup treble damages, attorneys’ fees, and joint and several liability under the antitrust laws. In fact, less than one month after the Washington Attorney General announced its first wave of settlements, a new class action lawsuit was filed in Washington State against Auntie Anne’s – one of the seven franchises listed in the initial announcement.
Companies are encouraged to contact a Jackson Lewis attorney with questions about compliance with antitrust laws as they relate to non-solicitation of employees agreements.
 Those states include California, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, and Rhode Island.
Answering a question left from a previous appeal in the same case, a divided panel of the U.S. Court of Appeals for the Ninth Circuit has concluded that a settlement agreement provision between a physician and his former employer, the California Emergency Physicians Medical Group (“CEP”), constituted a “restraint of a substantial character” on the physician’s medical practice and therefore violated California’s non-compete provision, Cal. Bus. & Prof. Code § 16600. As a result, the entire settlement agreement was void and unenforceable. Golden v. California Emergency Physicians Med. Grp., No. 16-17354 (9th Cir. July 24, 2018).
The parties agree that . . . Golden shall not be entitled to work or be reinstated at any CEP-contracted facility or at any facility owned or managed by CEP. The parties further agree that if CEP contracts to provide services to, or acquires rights in, a facility that is an emergency room as defined and regulated by California law at which Golden is employed or rendering services, CEP has the right to and will terminate Golden from any work in the emergency room without any liability whatsoever. Similarly, the parties agree that if CEP contracts to provide services to, or acquires rights in, a facility at which Golden is employed or rendering services as a hospitalist, CEP has the right to and will terminate Golden from any work as a hospitalist without any liability whatsoever.
Dr. Golden refused to sign the agreement, claiming that this provision of the agreement violated Bus. & Prof. Code §16600. In response, his attorney withdrew and “moved to enforce the agreement so he could collect his fee.” The district court granted the motion and ordered Dr. Golden to sign, reasoning that because these provisions would only prevent Dr. Golden from working for, not competing with, CEP, they were not a restraint on his medical practice and Section 16600 did not apply. Dr. Golden continued to refuse to sign the agreement and appealed.
First, the Ninth Circuit reviewed state law precedent addressing the parameters of Section 16600, concluding that a restraint on future employment may be considered “substantial” even if it is reasonable or narrowly-tailored. In light of this “undemanding” standard, the Court first ruled that the clause restricting Dr. Golden from working at any facility owned or managed by CEP was lawful, “as it simply restates the obvious proposition that an employee does not have a general right to work for an employer without the employer’s consent” and, in any event, the restraint on Dr. Golden’s ability to practice his profession was minimal because CEP owned or managed only a few clinics.
However, the Court of Appeals found that the clauses purporting to bar Dr. Golden from working at CEP-contracted facilities, now or in the future, violated Section 16600 due to the extent of CEP’s current emergency room contracts in California (handling between 25% and 30% of all emergency room admissions in the state), as well as at facilities with which it may later contract, given its significant growth in the state during the previous decade. The dissent contended that the majority was engaging in rank speculation in this latter respect, especially given that Dr. Golden had worked continuously during the decade-plus since his departure from CEP; had never been denied employment since the litigation began; and could not point to “any evidence that he would be fired, actually restrained, or barred from engaging in his profession upon signing the settlement agreement.” Nevertheless, the majority noted that the restrictive covenant would “affect not only Dr. Golden’s employment at CEP itself, but also his [existing] and future employment at third-party facilities” where CEP provided services, even if the CEP services began after the commencement of Dr. Golden’s employment, and even if the CEP services did not compete with the services Dr. Golden provided.
The majority also rejected CEP’s argument that because Dr. Golden was no longer an ER surgeon, the restrictions in the settlement agreement would not substantially interfere with his ability to practice medicine. As the court noted, the agreement allowed CEP to terminate his employment at any facility where he worked in the ER or as a hospitalist.
Importantly, California courts have interpreted and applied Section 16600 and its related provisions strictly, noting that by its own language there are only two circumstances under which substantial restraints of trade are allowed: (1) where a person sells the goodwill of a business and (2) where a partner agrees not to compete in anticipation of dissolving a partnership. Moreover, for decades California courts have held that, in light of the underlying policy favoring open competition and employee mobility, courts may reform (i.e. “blue pencil”) a contract only if a mistake was made and not to save an otherwise illegal contract. Thus, because neither of the narrow exceptions to Section 16600 existed, the Ninth Circuit declared the entire settlement agreement void and unenforceable, and remanded the case to the district court to proceed accordingly.
Golden reinforces, if not establishes, that even if they are contained within a settlement agreement, in California a restraint on future employment deemed substantial (basically, anything other than re-employment with the same employer) is not beyond the restrictive scope of Section 16600, regardless of whether it is “reasonable” or narrowly tailored. Employers with operations in California must therefore be cautious in attempting to incorporate or enforce such provisions into a settlement agreement, even if such provisions would be wholly acceptable in other jurisdictions in which they operate.
Please contact the Jackson Lewis attorney with whom you work with questions about the decision or any other non-compete issues you may have.
Just before midnight on July 31, 2018, the last day of its legislative session, the Massachusetts Legislature passed a significant bill regulating the use of non-compete agreements in the Commonwealth. Today, August 10, 2018, Governor Charlie Baker signed that bill into law.
In an article dated August 1, 2018, we examined the key aspects of the new law. We identified certain issues with the law that might lead to inconsistent enforcement by the courts (e.g., ambiguous consideration requirements, a conflicting and potentially unenforceable venue provision, etc.). Although Governor Baker could have rejected the bill or demanded further changes, it is no surprise that he signed it as written, given the amount of time, effort, and compromise that it took to get to this point. Moving forward, we hope that the Legislature will pay close attention to the courts as they interpret the law, and push for amendments where they are needed.
Companies and other readers are encouraged to return to this Blog for periodic updates and analysis regarding the Massachusetts non-compete law, as well as to contact a Jackson Lewis attorney for related legal assistance in drafting, enforcing and interpreting non-competition agreements under Massachusetts law.
Just before midnight on July 31, 2018, the Massachusetts Legislature passed a bill regulating the use of non-compete agreements in the Commonwealth. This development is a long time coming, as the Legislature had been attempting for nearly a decade to create a non-compete law.
In an article posted on our website on August 1, 2018, Erik Winton (Boston) and Colin Thakkar (Jacksonville) examine the details of the non-compete act, which is set to take effect on October 1, 2018. For guidance on how to comply with the new law, affected employers are encouraged to contact a non-compete attorney in Jackson Lewis’s Boston Office, including Erik Winton, Stephen Paterniti, and Sarah Herlihy.

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