39 Offices in 19 Countries

Restrictive Covenants in a Multistate BusinessLabor & Employment Educational Webinar Series

Susan M. DiMickele, Partner & Co-Head Employment

Labor & EmploymentSusan.DiMickele@squiresanders.com

+1.614.365.2842+1.212.872.9828

Meghan Hill, Senior AssociateLabor & Employment

Meghan.Hill@squiresanders.com+1.614.365.2720+1.212.407.0105

September 11, 2013

2

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

3

Restrictive Covenants: What’s at Stake?

• Your Intellectual Property May Walk Out the Door

• Employee Mobility – CompetitionAt-will employees change employers freelyCommon 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

4

Legal Framework

• Non-compete Agreement: a contract that seeks to protect legitimate business interests:

Long-term customer relationshipsConfidential 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 covenantsOthers 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.

5

Types of Restrictive Covenants

• Non-competition“no work”

• Non-solicitationCustomersSuppliersEmployees

• Non-disclosure: Not talking about this today!– However, are occasional state variations

» E.g., Georgia and two years

6

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

7

Choice of Law/Forum Selection: California

• Avoid California at all costsNon-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)

8

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 forumRestrictive covenants are enforceable if reasonable

Reform state

9

Considerations for States that Generally Do Not Enforce Post-Termination Noncompetes

(E.g., CA, ND, OK)

10

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

11

North Dakota

North Dakota models its statute prohibiting non-competes on California and also restricts the enforceability of noncompeteagreements – 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

12

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.”

13

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

14

Drafting Considerations for States that DoEnforce Post-Termination Noncompete

(the other states)

15

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

16

Critical Elements of Non-Compete Agreement

Four General Requirements:1. Consideration in exchange for non-compete

Offer of employment / continued employmentPromotion/change in job duties

2. Tailored to protect legitimate business interestLong-term customer relationshipsGoodwillTrade secretsOther 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

17

State law variations: Consideration

• At-will EmploymentBeginning 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 EmploymentSomething 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, 2013)

18

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)

19

Blue Pencil Drafting Example

• During the term of employment and for the period of twelve (12) months following the termination of employment for any reason (or for no reason), the Employee shall not, directly or indirectly, anywhere within (i) the United States, (ii) within 50 miles of any city or other geographic area in which the Company engages in business, and iii) within 50 miles of any city or other geographic area in which the Employee engaged in business for the Company, develop website content for pharmaceutical companies, physicians, practice managers or patients similar to that which Employee developed for the Company, or engage in any other business activities similar to the business engaged in by the Company,…

20

Restrictive Covenants: Scope

• Customer RestrictionsOnly those with whom personally dealt/responsible: (e.g., NY, MD, Cal, Tex)All customers of company (e.g., OH)

• GeographicWhere employer v. employee did business

• Length of TimeSome State Statutes Identify Reasonable/Unreasonable Length of Time

– E.g., Florida & Louisiana and 2 yearsOthers establish through decisions

• ExemptionsE.g., attorneys, professionals (AL); broadcasters, physicians (DE, KY, MA, TN/TX—certain circs); other ethics codes/industry regulations—e.g., financial services)

21

Restrictive Covenants: other terms to consider

• Terms Beneficial to EmployerTerm requiring employee to pay attorneys fees expended by employer to enforce the agreementExclusive/consent to jurisdictionSuccessorship clauseConsent to inform subsequent employers of agreement

• “Program” Issues (restrictive covenants for multi-state employers)

Consistency of useRestrictions tailored to individuals to the extent possible

– “One size fits all” approach can be a costly mistakeKnow your objectives: true enforceability v. presumed deterrent effect

22

Noncompetes: Critical Tips

• Anticipate the jurisdiction in which you will litigate your clause

• Know that jurisdiction » What is sufficient consideration?» Do state laws/court opinions restrict

scope/enforcement» Choice of jurisdiction v. public policy

» Will a court in that jurisdiction modify an otherwise unenforceable clause, and if so, by:

» Blue pencil? Red pencil?» Reformation?

23

Alternatives Ideas

• Benefits/Comp ForfeitureVaries state-by-state.

– Generally not enforceable in CA if it pertains to accrued/vested compensation.

– New York Employee Choice Doctrine » Employee has choice between forfeiture of benefit (e.g.

stock options) or compliance with noncompete» Noncompetes enforced without regard to reasonableness

where the employee voluntarily resigns

Disincentives to competition as opposed to a complete bar

• Post-termination consultancy agreements aka “garden leave” clauses

24

Questions?

Susan M. DiMickele, PartnerSquire Sanders (US) LLPLabor & Employmentsusan.dimickele@squiresanders.com+1.614.365.2842+1.212.872.9828

Meghan Hill, Senior AssociateSquire Sanders (US) LLPLabor & EmploymentMeghan.hill@squiresanders.com+1.614.365.2720+1.212.407.0105

25

Credit Information

• For those you who require CLE/CPD or HRCI credits please note the following states have been approved, California; Florida, Ohio (self-study) and Texas as well as Arizona, New York, and New Jersey through state reciprocity laws. CPD and CPE have also been approved. If you require credit in a jurisdiction not pre-approved we can assist.

• Tomorrow you will receive an email with a link to an online affidavit. Open this link and complete the form. Don’t forget to include the affirmation code on the form. Once completed, PDF a copy of the signed form to Robin Hallagan at robin.hallagan@squiresanders.com

• Remember to complete the webinar survey immediately following the end of this presentation. You are required to complete this evaluation before receiving a certificate of attendance.