The Management Series
Nov 2017

More State Limits Put on Non-Compete Deals

The number of states that forbid or restrict the use of non-compete clauses for employees grew this year, and several more states are trying to follow suit.

Employment law attorney Leiza Dolghih, a partner in the Dallas office of Lewis Brisbois, outlines how California made most non-compete agreements unenforceable, while Nevada and Illinois restricted their use.

Illinois bars the use of such agreements for low-wage workers, she writes, while Nevada nullified them for people who are laid off and allows them to work with clients or customers from their previous job as long as the employee did not solicit them. (Illinois recently filed its first lawsuit under the law, against a national payday lender that has about 250 employees in the state and some 3,000 across the country, according to The New York Times.)

The Idaho, Maryland, Massachusetts, New York and Washington legislatures debated changes to their non-compete statues but failed to take action, “which means they will probably try again in 2018,” Dolghih writes.

This May 2017 article from Law360, “Noncompete Agreements Under Siege at the State Level,” is a comprehensive rundown of changes to state laws governing non-competes in recent years. It breaks down the specific types of restrictions imposed, including the states (California, North Dakota and Oklahoma) that outright ban enforcement in most cases. Other categories include industry-specific prohibitions, low-wage restrictions and prohibitions in cases where workers involuntarily lost their jobs.

Non-compete agreements are not just vulnerable to legislative changes. State courts have been taking a harder look, and many are siding with former employees who challenged them on grounds they were too broad and sweeping to be enforced or were not applicable in specific circumstances.

We looked at some of the successful legal challenges to non-competes in the August 2015 management newsletter.

And the law firm Wilson Elser pointed to a recent decision by a New York appellate court as a textbook example of the need to be meticulous in drawing up non-compete agreements—and to do so with the help of counsel.

The case involved a financial services firm sold to another company. Some employees were terminated but were invited to reapply for their jobs. Several started their own firm, but the former employer argued that, since they had not sought reemployment, the non-compete agreement was still in force. A lower court as well as the appellate court ruled against the company on several grounds that Wilson Elser spells out in its analysis.

Many employees have non-compete clauses precisely because they are valuable, talented workers, so does a non-compete agreement mean you shouldn’t consider hiring them to avoid legal complications?

Not necessarily, says the law firm Klehr Harrison Harvey Branzburg.

It spells out some best practices for “hiring talent that have restrictive covenants with their current employer.” Most important, of course, is determining whether such an agreement exists in the first place and is enforceable. (For example, if an employee leaves a job in a state that allows non-competes but moves to one that bans them, it likely would be unenforceable.)

Here are some of Klehr’s other key tips:

“Adjust the job duties or impose restrictions as appropriate. …If the candidate’s employment with you would be in a position where he or she would be performing different job duties than what the candidate did for the old employer and these job duties are not competitive with duties performed for the old employer, the agreement may not be enforceable.”

“Instruct the candidate on not taking the prior employer’s business information. …Hires should be specifically instructed they are not to take such information, that in their final days with the old employer they should avoid looking at confidential files that are unrelated to the performance of job duties, and they should make sure to return all documents to the old employer. Employees, whether because of bad intent or temporary panic, are often inclined to take documents out the door for their benefit or as a crutch.”

“After hire/resignation, consider proactively contacting the prior employer. Under appropriate circumstances where the hire’s duties have been scoped out so that you think you have reasonably addressed the old employer’s legitimate concerns, consider pro-actively contacting the company to lay out the restrictions…regarding the non-disclosure of the former employer’s confidential information. This path may be sufficient to reassure the prior employer and prevent litigation.”

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