shutterstock_547628332In Spring 2011, the Georgia legislature passed a new restrictive covenant statute, which, for the first time, allowed Georgia courts in reviewing non-competition agreements between employer and employee to blue-pencil or “modify a covenant that is otherwise void and unenforceable so long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties.” O.C.G.A. § 13-8-53(d). Since the new Georgia statute only applies to agreements executed after its enactment, there has been limited litigation concerning the meaning and scope of this provision.

Most of the litigation between 2011 and the present has involved requests by a party that the Court strike an offending provision in a non-compete agreement. Recently, the Northern District of Georgia was given the opportunity to determine whether Georgia’s blue-pencil provision also gives Georgia courts the authority to modify an unenforceable non-compete provision. In LifeBrite Labs., LLC v. Cooksey, No. 1:15-CV-4309-TWT, 2016 WL 7840217, at *1 (N.D. Ga. Dec. 9, 2016), the former employer, LifeBrite, sued its former employee, Cooksey, after she began working for a competitor company. Cooksey’s non-compete provision provided as follows:

7.2. Non-Competition. For as long as she is employed and for a period of one (1) year thereafter, employee shall not participate, directly or indirectly, as an owner, employee, consultant, office management position, in any proprietorship, corporation, partnership, limited liability company or other entity, engaged in any laboratory testing that is being sold by employee on behalf of company.

The Northern District of Georgia found that this provision was overbroad and unenforceable as it did not contain any geographic limitation. Consequently, the Court considered whether or not Georgia’s blue-pencil rules allowed it to modify the non-compete provision to insert a reasonable geographic limitation. In reasoning through the analysis, the Court referred to pre-2011 cases in which Georgia courts interpreted a similar non-compete provision in the context of sale of business agreements. In those cases, Georgia courts held that the blue-pencil marks but it does not write. Thus, the NDGA declined to enforce Cooksey’s non-compete and held that in applying Georgia’s blue-pencil statute, “courts may not completely reform and rewrite contracts by supplying new and material terms from whole cloth.”

The NDGA also noted that Georgia’s employers are “sophisticated entities” which “have the ability to research the law in order to write enforceable contracts; courts should not have to remake their contracts in order to correct their mistakes.” This case is simply further caution to Georgia employers to review their non-competition agreements for overbreadth, vagueness, and the absence of essential limiting terms. As always, the attorneys at Seyfarth Shaw LLP are available to assist in these endeavors.

The LifeBrite Laboratories, LLC v. Cooksey case was dismissed with prejudice on January 25, 2017.

shutterstock_66377878Last Friday, on January 20, 2017, the Massachusetts Legislature began its annual tradition of attempting to promulgate non-compete and trade secret reform in the Commonwealth. A new bill has been filed by the same legislators who began this process back in 2009, Senator William Brownsberger and Representative Lori Ehrlich, which brings many of the past proposals to the table with some new additions as well. As we reported in July and November, the House and the Senate were unable to bridge their differences and agree on a compromise bill in 2016.

The bill seeks to adopt much of the Uniform Trade Secrets Act. In addition, it would formally recognize the inevitable disclosure doctrine, providing that “threatened misappropriation may be enjoined upon principles of equity, including, but not limited to, consideration of party conduct before or after commencement of litigation and circumstances of potential use, upon a showing that information qualifying as a trade secret has been, or inevitably will be, misappropriated.”

On the non-compete side, the bill notably limits non-competes (with some exceptions) to a duration of one year from the date of termination, requires that the employee receive the non-compete prior to a formal offer of employment or two weeks prior the commencement of the his or her employment, and requires consideration beyond continued employment for post-hire non-competes. The bill also requires courts to apply the bright-line “red pencil” approach if the non-compete agreement fails to satisfy any of bill’s requirements, but grants courts the discretion to reform or otherwise revise an agreement to comply with certain safe harbors set forth in the bill.

Other provisions of the proposed legislation may cause some consternation for businesses or, at the very least, may require those businesses to change their practices. For example:

  • An agreement must expressly state that the employee has the right to consult with counsel prior to signing;
  • Employers must review all non-competes with their employees at least once every three years for them to remain valid and enforceable;
  • For post-hire non-competes, notice must be given at least ten days before the agreement becomes effective;
  • If the employee has breached his or her fiduciary duties, or taken property of the employer, the duration of the non-compete may be extended to two years;
  • A geographic reach of any non-compete is that is limited to “areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence is presumptively reasonable”;
  • A restriction that “protects legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last 2 years of employment is presumptively reasonable”;
  • Employers have ten days after the termination of employment to “notify the employee in writing by certified mail of the employer’s intent to enforce the noncompetition agreement.” If the employer fails to do so, the non-compete is deemed waived by the employer. That being said, this requirement does not apply if the employee has unlawfully taken the employer’s property or already breached the non-compete, a non-solicit, an anti-piracy/no-raid covenant, a confidentiality agreement, or a fiduciary duty;
  • Non-compete agreements would not be enforceable against (1) employees who are not exempt under the Fair Labor Standards Act, 29 U.S.C. §§ 201-209, (2) undergraduate or graduate students engaged in short-term employment, (3) employees terminated without cause or laid off, (4) employees who are 18 or under, and (5) non-employees who perform services for less than one year; and
  • If the employee is a resident of, or has been working in, Massachusetts for at least thirty days immediately prior to the termination, Massachusetts law will apply, rending any out-of-state choice of law provision unenforceable.

Notably absent from the bill is the inclusion of a provision requiring “garden leave,” forcing employers to pay former employees bound by non-compete agreements fifty percent of their highest annualized salary over the last two years of employment for the restricted period. Such a provision has appeared in many of the proposed bills in the past few years.

We will continue to monitor these developments and report back with any updates. Perhaps 2017 is the finally year for non-compete and trade secret reform in Massachusetts after all. Readers of this blog know all too well, however, that this may just be another New Year’s resolution that the Massachusetts Legislature is not able to keep.

A special thanks to our friend Russell Beck for his thoughtful analysis of, and input into, the latest proposed legislation.

shutterstock_306198368Apparently there may be some life left yet in the Massachusetts Legislature’s attempt to pass non-compete reform this year.  As we previously reported, the House and the Senate were unable to bridge their differences and agree on a compromise bill before the formal session wrapped up on July 31.

According to the Boston Business Journal, however, “House and Senate leaders involved in the negotiations that came up just short at the close of formal sessions in July have continued talking, with a White House summit on non-competes serving as a spark plug to rekindle some hope that a compromise could still be brokered.”  Among other differences, the Senate bill would have limited non-compete agreements to three months, whereas the House version had a one year limit.  Both versions also provided for garden leave clauses, wherein an employee is paid during the restricted period, but the House set the compensation during the garden leave at 50% and the Senate recommended 100%.  The major disagreement, however, was over language that would have allowed both the employer and the employee to substitute garden leave pay for a different, mutually agreed upon, arrangement negotiated at the commencement of employment.  Even if a compromise deal is reached by the House and the Senate before the end of the year, it may be difficult to get passed in the full Legislature, as a single lawmaker can defeat any bill during an informal session by simply objecting to it.

The Associated Industries of Massachusetts and the Massachusetts High Technology Counsel have both said that they are in favor of something more akin to the House bill.

We will continue to monitor these developments and report back with any updates.  It may be that 2016 is the finally year for non-compete reform in Massachusetts after all . . . But we have said that before.

shutterstock_150165167On September 25, California Governor Jerry Brown signed into law Senate Bill 1241. SB 1241, effective January 1, 2017, adds Section 925 to the Labor Code to restrain the ability of employers to require employees to litigate or arbitrate employment disputes (1) outside of California or (2) under the laws of another state. The only exception is where the employee was individually represented by a lawyer in negotiating an employment contract.

For companies with headquarters outside of California and employees who work and reside in California, this assault on the freedom of contract is not welcome news. Particularly affected are companies that include forum-selection clauses in contracts with California employees that include non-competition or customer non-solicit provisions. Once SB 1241 becomes effective, it may foreclose—in all but the most unusual circumstances—the sometimes successful strategy of enforcing a non-competition agreement against a California resident through litigation in another state. Continue Reading New California Law May Preclude Use of Forum-Selection Clauses to Enforce Non-Compete Agreements in Employment Contracts

Seyfarth Offers 2016-2017 Edition of 50 State Desktop Reference:
What Employers Need To Know About Non-Compete and Trade Secrets Law

2016 50 state desktop guideWith the passage of the Defend Trade Secrets Act (DTSA) in May 2016, there is now a federal cause of action for trade secrets misappropriation. In addition, some states have passed legislation this year further narrowing the use of non-compete agreements, and both federal and state regulators have increased their scrutiny of such agreements in certain contexts.

Seyfarth’s Trade Secrets, Computer Fraud and Non-Competes Practice Group is pleased to provide the 2016-2017 Edition of our one-stop 50 State Desktop Reference, which surveys the most-asked questions related to the use of non-competes, restrictive covenants, and trade secrets in all 50 states. For the company executive, in-house counsel, or HR professional, we hope this guide will provide a starting point to answer your questions about protecting your company’s most valuable and confidential assets.

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shutterstock_331572470We’ve written a lot this summer about the Massachusetts legislature’s latest failed attempt at non-compete reform. Two other states in New England, however, are able to claim accomplishments in that regard. Specifically, Connecticut and Rhode Island each enacted statutes this summer imposing significant restrictions on the use of non-compete provisions in any agreement that establishes employment or any other form of professional relationship with physicians. While Connecticut’s simply law limits the duration and geographic scope of physician non-competes, Rhode Island completely banned such provisions in almost all agreements entered into with physicians.

Connecticut

Effective July 1, 2016, any covenants not-to-compete entered into, amended, or renewed in Connecticut can no longer restrict a physician’s competitive activities (i) for longer than one year and (ii) in a geographic region beyond 15 miles from the “primary site” where the physician practices. Primary site refers to “the office, facility or location where a majority of the revenue derived from such physician’s services is generated” or “any other office, facility or location where such physician practices and mutually agreed to by the parties and identified in the covenant not to compete.” The law also renders such provisions enforceable only if (i) the provision is made in anticipation of a partnership or ownership agreement or (ii) the employment or contractual relationship is terminated by the employer for cause.

Rhode Island

Effective July 12, 2016, it is now unlawful in Rhode Island to restrict in any way “the right to practice medicine in any geographic area for any period of time after the termination” of any partnership, employment, or professional relationship with a physician. The law also prohibits any restrictions on the right of physicians “to solicit or seek to establish a physician/patient relationship with any current patient of the employer.” It does not, however, apply in connection with the purchase and sale of a physician practice, provided the restrictive covenant is less than five years in duration.

Takeaway

Entities that employ physicians in Connecticut and Rhode Island should take note of these recent changes to the law and thoroughly review their existing physician non-compete and non-solicitation agreements. These agreements may need significant modifications to be in compliance with the new standards discussed above.

shutterstock_444377182-300x213In what has become a highly anticipated annual game of “Will They/Won’t They,” the Massachusetts legislature again failed to pass comprehensive noncompete reform legislation this year, despite much fanfare and high hopes from certain quarters. This should come as no surprise to our loyal readers, who have seen this happen virtually every year over the past decade, but it actually seemed as though something might be different this year, with the House and Senate both passing bills, and the Governor signaling his support for the House version.  Alas, the wheels of state government have again come to a screeching halt with no movement as the 2016 legislative session ended late last night with no compromise.  No controversial matters can now be advanced until the next legislative session, which begins in January 2017.  As we seem to say every summer, maybe next year . . .

shutterstock_444377182According to The Boston Globe, Massachusetts Governor Charlie Baker has publicly voiced his support for some restrictions on noncompete agreements, but he does not want to abolish them entirely. Specifically, Governor Baker supports the bill passed by the Massachusetts House of Representatives (discussed previously here), but not the far more restrictive bill passed by the Massachusetts Senate (discussed here). According to Governor Baker’s spokesman:

The Governor favors the House version of the noncompete legislation because he believes it better balances workers’ abilities to seek new employment while ensuring cutting edge businesses can protect essential intellectual property. . . . Finding the right compromise on this issue is essential to ensuring innovative businesses want to stay and grow in the Commonwealth.

A conference committee, being led by House Ways and Means Chairman Brian Dempsey and Senator Daniel Wolf, with Representatives John Scibak and Jay Barrows and Senators William Brownsberger and Ryan Fattman, will attempt to resolve the differences between the competing bills by the end of the formal legislative session, which wraps up for the year on July 31.

We will be monitoring and will report on any progress in the conference committee this week, so stay tuned.

shutterstock_131276240As we last reported, just a few weeks ago, the Massachusetts House of Representatives unanimously approved a non-compete bill that revised the original draft bill and addressed some of the business community’s concerns (such as the mandatory garden leave provision, prohibition on judicial reform of overbroad agreements, etc.). However, the Senate yesterday introduced a version that would dramatically curtail the enforceability of non-competes in Massachusetts, making substantial changes to the House’s version (and in some cases, even going beyond the original bill prior to the House’s compromise edits). Most — if not all — of the revisions are sure to concern those companies that use non-competes as one tool to protect their intellectual property:

  • The time limits for non-competes (except in cases where an employee has breached a fiduciary duty or engaged in misappropriation) would be limited to a mere three months, as distinct from the House’s 12 month provision;
  • To be enforceable, an employer must inform the employee of its intention to enforce the non-compete within 10 days of the termination of the employment relationship;
  • All non-competes must be “reviewed” with the employee at least once every 5 years after execution, although it is unclear what this “review” must consist of;
  • The non-compete must be supported by a garden leave clause or other mutually agreed upon consideration — although unlike the House’s version, which required a garden leave provision whereby an employee would receive 50% of his or her annualized salary or other agreed upon consideration (without dictating what the consideration must be), the Senate’s version requires the garden leave and/or other consideration to be equal to or greater than 100% of the employee’s highest annualized earnings within the prior 2 year period (note that earnings can be substantially greater than salary);
  • In addition to the numerous categories of employees that cannot be bound by non-competes under the House’s approved bill, the Senate’s version also prohibits enforcement of non-competes against employees “whose average weekly earnings . . . are less than 2 times the average weekly wage in the commonwealth” (based on the latest figures published by the United States Department of Labor, that would mean that employees making less than approximately $118,000 could not be bound by non-competes);
  • The Senate’s bill would reinstate the provision in the original bill that a court could not judicially reform an overbroad non-compete — a major departure from the current state of the law in Massachusetts (and an about-face from the House’s compromise);
  • The bill would also prohibit a court from relying on the “inevitable disclosure” doctrine to supplement non-competes or render an otherwise unenforceable agreement enforceable;
  • The bill would prohibit any provision that would penalize an employee from defending against or challenging the enforceability of a non-compete agreement (in other words, attorneys’ fees provisions);
  • Finally, Senator Mark Montigny of the Senate’s Committee on Rules has recommended that the bill be declared an “emergency law” — which would mean that if passed, it would go into effect immediately, rather than on October 1.

As previously noted, the current legislative session ends on July 31, so legislators will need to move quickly if this version is to pass. While we noted in our last post that the atmosphere in the Commonwealth seemed favorable to passage of the House’s version, we anticipate that the local business community will strongly voice its opposition to this latest draft.

We will keep you updated as we approach the end of this year’s legislative session…

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As we previously reported, Massachusetts is making yet another go at non-compete reform, as the Joint Committee on Labor & Workforce Development introduced a compromise bill at the end of May that has many in the Commonwealth talking.  As we noted, there were several provisions that gave some commentators pause, including most notably a garden leave provision that would require employers to pay former employees bound by non-compete agreements 50% of their highest annualized salary over the last 2 years of employment for the restricted period.

House leaders have recently made edits to the bill that might provide some comfort to employers who rely on non-compete agreements and were wary of the bill’s provisions.  First, the revised bill would allow an employer to agree to “other mutually-agreed upon consideration” as an alternative to garden leave, provided such consideration is specified in the agreement.  This change has already made some in the business community more comfortable with the bill; for example, the Greater Boston Chamber of Commerce’s CEO, Jim Rooney, acknowledged that “it’s better than what we were working with.”

The revised bill would also maintain the status quo by allowing judges in the Commonwealth to reform non-competes that they deem overbroad (for example, by replacing a 100-mile geographic scope with a 50-mile one), which is a significant departure from the bill’s original text, which would have forced judges to invalidate such agreements even if they were largely enforceable, but only slightly overreaching.  The original “red pencil” text, like the garden leave provision, was quite concerning to many in the business community, so this change will likely comfort many employers.

Additionally, an amendment revised the jurisdictional provision of the bill, and now provides that all civil actions relating to employee non-compete agreements be brought in either the county where the employee resides, or Suffolk county (where such actions would be brought in the Business Litigation Session) — although this still leaves some confusion as to whether a claim relating to a non-compete agreement could be brought in federal court.  If not, the bill might lead to claim-splitting where an employer seeks to assert a Defend Trade Secrets Act claim.  Finally, the revised bill would only apply to agreements entered into on or after October 1, 2016, allowing employers with additional time to revamp their agreements.

Yesterday, the House voted unanimously to approve the revised bill, sending it to the Senate, which will consider the legislation after July 4th.  That said, despite the improvements noted above, there are still many provisions in the bill that might give employers heartburn; as we mentioned in our last post, among other things, the bill eliminates “continued employment” as sufficient consideration for such agreements, and prohibits non-competes across-the-board for certain categories of employees, including most notably those classified as non-exempt under the Fair Labor Standards Act.

It remains to be seen whether legislators will continue to revise the bill to address these (and other) concerns.  However, given that the Senate voted unanimously to ban non-competes outright fairly recently, we anticipate that the bill will meet with considerable success in the Senate.

Finally, even assuming the bill passes, it’s still unclear whether Governor Baker will sign or veto it, given that his administration has not strongly signaled one way or the other how he views the pending legislation.  That said, in the face of the unanimous vote in the House (and potential for a unanimous vote in the Senate), Governor Baker may be hard-pressed to justify a veto.

As always, we will keep you updated on this topic, so stay tuned!