In what may be a trend, several courts around the country this year have embraced strict interpretations of non-compete agreements, refusing to blue pencil or equitably reform overbroad or unreasonable clauses in non-compete agreements. Traditionally, courts have exercised the doctrine of equitable reformation to re-write provisions to render them reasonable, or at the very least, strike unreasonable provisions to save those that are reasonable.
In the first half of 2016, we have already seen significant changes to a number of state non-compete laws. In this post, we provide a compilation of recently enacted legislation in Alabama, Connecticut, Idaho, Oregon, and Utah, as well as several important developments at the federal level.
Last week, the Illinois Attorney General filed suit against Jimmy John’s, alleging that the company’s non-competes violate state law. These non-competes prohibit all employees, including sandwich makers, from working during their employment and for two years afterward at businesses within several miles of any Jimmy John’s nationwide that earn more than 10% of their revenue from submarine or similar sandwiches. The complaint alleges that the non-competes do not protect a legitimate business interest such as trade secrets or customer relationships, and it seeks a declaratory judgment that the agreements are unenforceable.
In the last few weeks, Utah and Idaho have each passed bills changing the landscape of non-compete enforceability in strikingly different ways. Utah’s law places further limitations on the use of non-competes. In contrast, the Idaho bill (expected to be signed by the governor shortly) permits greater enforceability of non-competes.
The states have a rich tradition of passing legislation forbidding or limiting the use of non-compete agreements with identified classes of employees. As you might expect, a number of states forbid or limit the use of non-compete agreements with:
- Physicians, nurses, psychologists, social workers and other medical professionals
- Individuals working in broadcasting
A recent decision from a Wisconsin state court serves as a cautionary tale for employers that do not routinely impose or enforce non-compete restrictions consistent with the employee’s role and potential to harm the business.
In Kohl’s Department Stores Inc. v. Janet Schalk, 2015CV001465 (Wis. Cir. Ct. Aug. 11, 2015), Judge Robert Mawdsley denied Kohl’s request for an injunction preventing its Chief Information Officer, Janet Schalk, from joining Hudson’s Bay Company partly on the grounds that Schalk’s non-compete was overly restrictive in light of Schalk’s role in comparison with the non-competes of other employees. Kohl’s, relying upon its non-compete contract with Schalk barring her from working in a similar position with a competitive retailer for one year, argued that Schalk should be barred from joining Hudson’s Bay, a Canadian department store company, because Schalk “has the playbook, the crown jewels, our entire strategy in her hands.” Schalk argued that the non-compete was too broad and that Hudson’s Bay was not a competitor given its high-end retailing–featuring Saks Fifth Avenue and Lord & Taylor–compared to Kohl’s mid-tier status. Schalk also contended that Kohl’s overstated her role and knowledge of the company’s strategy.
The Pennsylvania Supreme Court recently held in Socko v. Mid-Atlantic Systems of CPA, Inc. that a non-compete is enforceable only if a current employee receives new consideration beyond continued employment. The Court held that this is the case even if a non-compete provides that the parties “intend to be legally bound,” which typically obviates the need for consideration under the Pennsylvania Uniform Written Obligations Act (UWOA). After considering the historical background regarding non-competes and general principles of statutory construction, the Court concluded that “a construction of the UWOA which would vitiate the need for new and valuable consideration when entering into an agreement containing a restrictive covenant after the initiation of employment would be unreasonable.”
Although last year’s legislative efforts to ban—or limit further—non-competes in Massachusetts failed, proponents have vowed to revive the issue again in 2015-2016. Excluded from those proposed measures, however, has always been any restriction on employers’ use of customer non-solicitation clauses. Should the Legislature ever pass restrictions on non-competes, employers that have not already done so will flock in droves to the use of customer non-solicits, particularly with respect to sales-related employees. This makes the courts’ ongoing struggle to define customer “solicitation” in the digital age of paramount importance.
Massachusetts employers and employees have enough to contend with trying to keep abreast of the judicial and legislative fits and starts of non-compete reform within the state, let alone developments in other states. It is important to remember that non-compete law varies widely from state to state, and these variations may come into play if employees are in different states or if a former employee is moving to a new state. Below you will find just a few of the many variances in state non-compete law.
In the rapidly changing business world, protecting a company's human capital and proprietary information is critical to maintaining a competitive edge. On this blog, Nutter's experienced Business Litigation and Labor, Employment & Benefits attorneys offer news and insights on all aspects of restrictive covenants and trade secrets—from analyzing a rapidly evolving body of case law, to summarizing new legislation and legislative efforts, to providing other need-to-know updates and more.