Non-Solicitation-of-Employee Agreements Are Not Non-Competes—Except When They Are

Employers commonly include prohibitions against post-employment soliciting of customers and employees in employment agreements. Most states simply treat prohibitions against soliciting customers like non-compete agreements—they are generally unenforceable unless narrowly tailored.[1]  Other states go beyond the non-compete analysis and apply additional factors to determine whether a customer non-solicit is enforceable.[2]

When it comes to non-solicits of employees, it’s commonly thought that they are easier to enforce than full-blown non-compete restrictions—but are they? The answer lies in state law, and states approach the issue differently.

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The Danger of “Autofill” and Inadvertent Disclosure in Employee Mobility Matters

Control KeyThe Federal Rules of Civil Procedure were amended in December 2015 to help mitigate the risk of inadvertent disclosure of privileged information present in virtually every litigation. Such risk, however, is particularly acute in litigation involving trade secrets, non-competition, non-solicitation, and/or non-disclosure agreements.

Employee mobility litigation poses a special risk for inadvertent disclosure because of the email address “autofill” function common in various email programs. Needless to say, employees use work-issued email accounts.  Even after the employee leaves the company, the email account often remains active and may be monitored by the former employer, especially if the employee and company become litigation adversaries. Continue Reading

Non-Competes Depart the Federal Scene in the New Administration

The past two years have marked a seemingly volatile time for non-compete law in the United States, traditionally a state issue. National political forces—the United States Department of the Treasury, the White House, and Senators Al Franken and Chris Murphy—showed an interest in attempting to limit the enforceability of non-competes. We have previously covered this shift here and here. But in 2017, that federal tide has turned with the arrival of the Trump administration.

Regulating non-competes has long been exclusively the domain of the states. But in 2015, Senators Al Franken and Chris Murphy introduced a bill to limit the use of non-competes in contracts with low-wage workers. In March 2016, the Department of the Treasury’s Office of Economic Policy issued a report titled “Non-compete Contracts: Economic Effects and Policy Implications.” It concluded that non-competes are harmful to the broader economy. Two months later, the Obama White House released a “Call to Action” encouraging states to reform and limit non-compete agreements. Continue Reading

To Plead or Not to Plead? That Is the (State or Federal) Question

Well, that didn’t take long! Not even a full year after President Obama signed the Defend Trade Secrets Act into law on May 11, 2016, Judge Edward G. Smith of the United States District Court for the Eastern District of Pennsylvania entered judgment for plaintiff on the first DTSA claim to be litigated to a jury verdict.

To be fair, the case was already in progress when DTSA became law, so plaintiff Dalmatia Import Group, Inc. amended its complaint to add the claim to its existing state law trade secret claims. The jury awarded Dalmatia $500,000 on both its federal and state trade secret misappropriation claims.

That’s when things got interesting. Defendants argued that because the jury was never instructed on the differences between the federal and state statutes – most importantly that damages were not available under the federal statute prior to its May 2016 enactment – the court should decline to enter judgment on a verdict that did not clearly apportion damages between the state and federal claims.

Ultimately, the court sided with the plaintiff. But the dispute raised an interesting question: Now that both federal and state claims are available in most jurisdictions, can you and should you plead both? In California, where I practice, the answer is not all that straightforward.

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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.