New York Appellate Court Declines To Enforce Non-Compete Agreement Against Employees Terminated Without Cause

NY_SkylineIt should come as little surprise to employers that the New York courts take a skeptical view of non-compete agreements between employers and employees. Consistent with this view, a New York State appellate court recently confirmed what many, including prior authors of this blog, already understood: in New York, any employer who terminates an employee without cause risks losing the ability to enforce a non-compete agreement against the employee.

The recent decision, Buchanan Capital Mkts., LLC v. DeLucca, et al., 41 N.Y.S.3d 229 (1st Dept. 2016), came on appeal by a financial compliance consultancy (employer) seeking an injunction to enforce non-compete agreements against former employees who solicited business from the employer’s entire client list soon after leaving employment. The employees did so despite non-solicitation provisions within the non-compete agreements prohibiting the client solicitation. Continue Reading

When Your Contractor Isn’t a Contractor and Your Non-compete Isn’t Enforceable

business-962364You hire an independent contractor and include a non-competition clause in the independent contractor agreement. You figure that, even if somehow a court later concludes this person is an employee, at least you still have the protection of the non-compete. So imagine your disappointment when you learn that your contractor actually was your employee and the non-compete clause is unenforceable. That is what happened to an employer in a recent Virginia case, and the trial court’s decision provides a warning to be heeded by all employers. Reading & Language Learning Ctr. v. Sturgill, Circuit Court of Fairfax County, Virginia, August 4, 2016, Case No. CL-2015-10699.

Charlotte Sturgill was training to be a speech therapist but needed a supervised clinical fellowship to obtain certification. She entered into an agreement with the Reading & Language Learning Center (RLLC) to work as an independent contractor for a year to obtain her license. In the contract, the parties agreed not to “employ any contracted employee or contract with any current client of the Other for a period of two years.”

After one year, Sturgill left RLLC for employment as a full-time therapist for Ingenuity Prep, a local charter school. RLLC had provided services to Ingenuity as a subcontractor of yet another business. RLLC sued Sturgill in Circuit Court for Fairfax County, alleging that she had breached her non-compete agreement by accepting employment at Ingenuity Prep.

The Court ruled in favor of Sturgill for several reasons worthy of attention. First, the trial court ruled that the non-compete was unenforceable as written because it failed the “janitor” test – it would have prohibited Sturgill from working “in any capacity” for a competitor, even in a position as different from hers as a janitor. A non-compete that prohibits an employee from working “in any capacity” for a competitor will be deemed overbroad unless the employer can show a legitimate business interest for such a broad restriction. Ordinarily, you should explicitly state that the person is prohibited from doing for a competitor what the person did for you. The Court rejected RLLC’s argument that the parties “understood” that “in any capacity” actually was limited to what Sturgill had done for RLLC, because Virginia will not “blue pencil” a restrictive covenant.

Next, the Court found that, even if the non-compete were enforceable, Sturgill did not breach it because of the particular language that RLLC used: “RLLC and the Consultant agree not to employ any contracted employee or contract with any current client of the Other” (emphasis in Court’s opinion). The Court reasoned that this employ/contract distinction, strictly speaking, meant that Sturgill was prohibited only from being an independent contractor for Ingenuity Prep, not from being its employee. Had RLLC meant to prohibit her from being employed by Ingenuity Prep, it would have repeated the term “employ” rather than switch to “contract.” The Court rejected RLLC’s argument that others had understood the purported restriction of the non-compete in the past.

Finally, the Court found RLLC misclassified Sturgill as an independent contractor when in fact she had been its employee. Because Sturgill was unlicensed, RLLC directly supervised her work. RLLC told her what schools to visit and how many students to see each week, and ultimately approved her schedule. She “met frequently with her supervisors to discuss treatment plans,” and her supervisors gave final approval to her reports and hours worked.

Interestingly, the Court went on to rule that RLLC’s misclassification of Sturgill meant that their agreement violated public policy because of the various ripple effects under Virginia and federal law, principally the employer’s failure to pay various employment-related taxes, and therefore was void. Perhaps the Court was implying that this was an additional basis on which to negate the non-compete.

What are the lessons to be learned?

*          Employers must take care to avoid creating the impression that their restrictive covenants are mere templates that are replicated from one employee to the next. Different employees do different jobs; employers may have at least slightly different legitimate business interests in restricting those employees post-employment. In this case, the Court appeared puzzled that RLLC’s agreement with Sturgill contained the same non-compete language as RLLC’s agreement with a subcontractor: “Either as a matter of pure coincidence or through the sharing of information, the restrictive covenant in [RLLC’s subcontract] contained the same language” as the non-compete with Sturgill. The point is that employer-employee and contractor-subcontractor relationships are inherently different. It looked strange to the Court to see similar restrictive language in two different kinds of agreements.

*          Employers should periodically review their non-competes to ensure continued compliance with evolving standards of enforceability. The Court noted that RLLC had used the same language in its non-compete provisions with many employees and contractors over the past decade.

*          Language matters. The Court found it odd that RLLC called Sturgill a “consultant” in one provision, but an “independent contractor” in another. The terms are not mutually exclusive, but the difference may have raised a judicial eyebrow, in that this appeared to be language that was merely copied from another agreement. Similarly, the employ/contract language noted above prompted the Court to infer that RLLC had intended different things by using different words, which in turn led the Court to conclude that RLLC’s agreement might have prohibited Sturgill from contracting with Ingenuity Prep (i.e., being an independent contractor), but it did not prohibit her from being employed by Ingenuity Prep.

Employers understandably cannot reinvent the non-compete wheel with every new employment contract. Nor can they simply clone the most recent restrictive covenant from another employee’s agreement without ensuring that the terms of restriction are suited to the particular circumstances of the particular employee. Proving that particularity will be essential when the time comes to ask a judge for an injunction against that employee.

New York Employers’ Use of Non-Competes in Jeopardy?

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New York Attorney General Eric Schneiderman has promised to introduce a bill that would restrict New York employers’ use of non-compete agreements for certain non-highly-compensated employees. The proposed legislation would (i) ban the use of non-competes for employees who earn less than $900 per week; (ii) require employers to pay additional monetary consideration in exchange for an employee entering into a non-compete agreement; (iii) limit the duration and substantive scope of such agreements; and (iv) create a private right of action for violations of the prospective new law. In anticipation of these potential changes, employers must carefully consider the necessity of requiring certain employees to enter into non-compete agreements, and closely review their current agreements to ensure that they are only as expansive as necessary to protect their lawful interests.

Trade Secrets and the 2016 FOIA Improvement Act

united-states-capitol-buildingLast summer, Congress passed and President Obama signed into law the FOIA Improvement Act of 2016 (Public Law No. 114-185), which adds to and amends the Freedom of Information Act (FOIA). The stated purpose of the amendments to the FOIA is to create a “presumption of openness” limiting the federal government’s discretionary power to withhold requested information only when disclosure would result in “foreseeable harm.” For those that transact business with or even simply communicate with the government (referred to as “submitters” in FOIA parlance), the FOIA changes mean that submitters such as government contractors and grant recipients must proactively respond when a FOIA request potentially targets confidential and/or proprietary data that has been shared with the government.

Importantly, the 2016 FOIA improvement Act did not change FOIA Exemption 4, which protects from disclosure “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential.” Under Exemption 4, the government is prohibited from disclosing trade secrets or other proprietary/confidential information that any submitter has shared with the government. Unlike with some of the other FOIA exemptions, in their interpretation of Exemption 4, Courts have determined that the government lacks any discretion to disclose trade secret or commercial confidential/proprietary information in response to a FOIA request.

The 2016 FOIA Improvement Act was passed to accelerate the FOIA process and to compel government FOIA officials to provide as much information as soon as possible in response to a FOIA request. Specifically, the Act now imposes a penalty (i.e., the waiver of the statutory FOIA fees) on the agency for failing to provide a timely FOIA response. The Act also requires that the FOIA response segregate exempt information from releasable information in the same document, as an agency can no longer simply refuse to produce any document containing exempt information. In addition, the Act requires the agency to produce electronic copies of documents/data, which can be instantly disseminated by the requesting party, rather than paper documents, in response to a FOIA request. Furthermore, the Act requires the creation of a federal government FOIA portal that allows the same FOIA request to be simultaneously submitted to multiple agencies. As a result, submitters must be poised to respond immediately as soon as the government provides notice that a FOIA request seeks disclosure of the submitter’s data and/or documents.

As an initial step, whenever any person or entity first shares information/data with the government that it does not want disclosed to any third party, the title page and each subsequent page of the confidential document or data should be plainly marked as containing “confidential and proprietary information which is exempt from disclosure under FOIA.” Next, when the agency contacts the submitter (as FOIA requires) to tell them that a request seeks the disclosure of their information, the submitter should promptly respond by identifying: 1) the specific information within each responsive document that is exempt from disclosure, 2) the particular FOIA exemption (there are nine) that prohibits disclosure (as stated above, Exemption 4 protects trade secrets and confidential/proprietary data), and 3) why that exemption applies to each identified section of data/information that the submitter seeks to protect. Also, the submitter (or submitter’s counsel) should attempt to maintain an open dialogue with the assigned agency FOIA official throughout the FOIA process to promptly address and resolve any disagreements about what should and should not be disclosed before the agency takes a final disclosure position, which is often difficult to unwind. Finally, the submitter must be ready to assert a “reverse FOIA” action to prevent the disclosure of trade secrets or other confidential/proprietary information in the event that the agency disregards the submitter’s exemption recommendations before the agency releases the submitter’s trade secrets and confidential information in response to a FOIA request.

Rethinking “Cause” May Enhance the Enforceability of Your Non-Compete

Although the arrival of the new Administration moots the Obama White House’s recent “State Call to Action on Non-Compete Agreements” addressing that administration’s concerns about non-compete agreements in the workplace, the fact remains that non-competes are governed by state law, and that some of the issues raised in the “State Call” will remain with us.

One such issue is the enforcement of non-competes against employees who are terminated without cause. For example, some courts have found that an employer has no legitimate business interest in enforcing a non-compete when the employer terminates an employee without cause. Politics aside, this is a concern that employers can address so as to enhance their odds of enforcing a non-compete.

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U.S. Supreme Court Denies Certiorari on ITC Ban Based on Trade Secret Misappropriation

Test TubesA Chinese tire manufacturer, Sino Legend, was found to have misappropriated trade secrets—in China—from another Chinese company. The International Trade Commission, in turn, banned Sino Legend’s tires from the United States for 10 years. On January 9, 2017 the U.S. Supreme Court denied Sino Legend’s Petition for a Writ of Certiorari on whether the U.S. International Trade Commission (ITC) had jurisdiction over the misappropriation of trade secrets that were alleged and found to have been misappropriated and used in China.

The Practical Takeaways. The ITC’s ban reinforces the importance of trade secrets, especially in light of the recently enacted Defend Trade Secrets Act (DFTA) of 2016, as well as the ITC’s unique and powerful remedies. But before litigation becomes necessary to address trade secret misappropriation, companies can take steps to protect themselves, including: Continue Reading

Moving Toward a Federal-State Approach To Noncompete Regulation?

Non-compete agreements are currently exclusively regulated by a panoply of state laws. Coextensive with recent scrutiny over anti-competitive business practices relating to non-compete use, federal interest in non-compete regulation has heightened, culminating in a White House “Call to Action” urging certain state reforms. While there appears to be room for a limited level of federal regulation, such regulation should focus on bridging the information gap between employers and employees rather than blessing an overtly pro-employer or pro-employee policy with the imprimatur of the federal government.

To read the full article, click here.

California Further Restricts Employers from Trying to Enforce Non-Compete Agreements

business-962364Are you an employer based outside of California with employees who live or work in California? If so, you will want to take note of a new California Labor Code provision that becomes effective on January 1.

Not surprisingly, companies headquartered outside of California generally have employment agreements that are purported to be governed by the substantive law of the state in which the company is headquartered. This is true even when the company hires employees who live and work in California.

But companies need to be aware that, effective January 1, new California Labor Code section 925 goes into effect and limits their ability to apply the substantive law of a different state to their California employees. (The new provision applies only to contracts “entered into, modified, or extended on or after January 1, 2017,” and does not have retroactive effect.) Continue Reading

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