Non-Compete Enforceability

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.

We are pleased to announce the webinar “2016
National Year In Review:webinar What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law” is now available as a webinar recording.

In Seyfarth’s first installment of its 2017 Trade Secrets Webinar series, Seyfarth attorneys reviewed noteworthy cases and other legal developments from across the nation over the last year in the areas of trade secrets and data theft, non-competes and other restrictive covenants, and computer fraud. Plus, they provided their predictions for what to watch for in 2017.

As a conclusion to this well-received webinar, we compiled a summary of three takeaways that were discussed during the webinar:

  • The DTSA can be a powerful tool to protect intellectual capital. However, in order to take full advantage of the DTSA, businesses should carefully check their agreements with employees, handbooks and equity awards to make sure they contain language mandated by the Defend Trade Secrets Act.
  • 2016 was a record year for data and information security breaches. Organizations should alert and train employees on following company policies, spotting potential social engineering attacks, and having a clear method to escalate potential security risks. Employee awareness, coupled with technological changes towards better security will reduce risk and exposure to liability.
  • Several states enacted laws to limit the scope and duration of non-competes in 2016. There were also some significant decisions limiting their scope and enforceability in 2016 as well. Companies should have their non-disclosure and non-compete agreements reviewed to ensure that they comply with the latest state and federal laws, including the new Defend Trade Secrets Act.

2016 TS YIR Cover

The 2016 Year in Review is a compilation of our significant blog posts from throughout last year and is categorized by specific topics such as: Trade Secrets, Computer Fraud and Abuse Act, Non-Compete & Restrictive Covenants, Legislation, International, and Social Media and Privacy. As demonstrated by our specific blog entries, including our Top Developments/Headlines, Trade Secrets Webinar Series – Year in Review and our dedicated page concerning federal trade secret legislation, our blog authors stay on top of the latest developments in this area of law and provide timely and entertaining posts on significant new cases, legal developments, and legislation.

The 2016 Review also includes links to the recordings of all webinars in the 2016 Trade Secrets Webinar Series. More information on our upcoming 2017 webinars is available in the program listing contained in this Review. Our highly successful blog and webinar series further demonstrate that Seyfarth Shaw’s national Trade Secret, Computer Fraud & Non-Competes Practice Group is one of the country’s preeminent groups dedicated to trade secrets, restrictive covenants, computer fraud, and unfair competition matters and is recognized as a Legal 500 leading firm.

Clients and friends of the firm can request a digital, CD, or printed copy of the 2016 Review below.

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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.

Texas CourthouseA Texas Court of Appeals affirmed a summary judgment last month in favor of an ex-employee declaring that a noncompete clause in an asset purchase agreement and separate noncompete agreement did not bar him from competing with his former employer after he had resigned his position. The court’s opinion serves as a reminder that conditions subsequent in noncompete clauses must be drafted with special care in order to avoid the risk that former employees may ignore such clauses with impunity.

Jason Player, a former IT manager for East Texas Copy Systems, Inc. (“Copy Systems”) sold his business to Copy Systems and, in the process, signed an asset purchase agreement (“APA”), as well as a separate noncompete agreement (“NCA”), that contained clauses precluding him from competing with Copy Systems for a certain period of time. Both the APA and the NCA also included nearly identical provisions which provided that “[i]f . . . Player’s employment with [Copy Systems] is terminated prior to two years from the date of this Agreement [July 1, 2013] for any reason other than a for cause termination, this non-compete Agreement will no longer be binding.” Player resigned his position with Copy Systems effective June 30, 2015—one day shy of the two-year period—and immediately began engaging in IT-related business for a competitor. Copy Systems then sent a cease-and-desist letter to Player demanding that, pursuant to its interpretation of the noncompete clauses, he refrain from engaging in any activities that are competitive with Copy Systems.

Player then filed suit in Texas state court against Copy Systems, requesting a declaration that the NCA and noncompete clause in the APA no longer forbid him from competing with Copy Systems. Copy Systems, in turn, filed a counterclaim seeking (1) a declaration that the noncompete provisions at issue remained effective, and (2) damages for breach of contract. As the facts were undisputed, both parties filed motions for summary judgment. After a hearing, the trial court granted Player’s motion and denied Copy Systems’.

On appeal, Copy Systems challenged the trial court’s construction of the parties’ noncompete agreement as reflected in the NCA and APA. Both parties focused on the interpretation of “[i]f . . . Player’s employment with [Copy Systems] is terminated prior to two years from the date of this Agreement for any reason other than a for cause termination, this non-compete Agreement will no longer be binding.” Copy Systems argued that this clause should be interpreted so that the noncompete would remain effective post-termination in the event Player resigned.  This is, the noncompete would cease to apply only if the Player was fired without cause. Player, on the other hand, maintained that the clause was effective if either party terminated his employment, including if he resigned.

Siding with Player, the court of appeals construed this clause, like the trial court had before it, to be a condition subsequent clause, i.e., a clause where the fulfillment of a condition excuses performance of an otherwise binding agreement. The court reasoned that, adhering to the plain and ordinary meaning of the agreements’ terms, the clause at issue was effective if either party terminated Player’s employment, since that clause did not identify which party must terminate the employment relationship. According to the court of appeals, what triggers the condition subsequent clause is “the termination of Player’s employment, not which party initiates the termination.” Copy Systems’ argument to the contrary was, in effect, asking the court to rewrite the agreement to insert the following underlined language: “[i]f . . . Player’s employment with [Copy Systems] is terminated [by Copy Systems] prior to two years from the date of this Agreement for any reason other than a for cause termination, this non-compete Agreement will no longer be binding.” This the court refused to do. Because Player resigned on June 30, 2015, and nothing in the parties’ agreement indicated that the inclusion of this clause was intended to restrict the party initiating the triggering termination to only Copy Systems, the court held that Player was excused from the performance of any obligations prescribed by the APA and NCA.

The takeaway from this case appears to be that employers should be cautious when inserting conditions subsequent in noncompete agreements, especially if the language triggering the condition subsequent does not specify which party terminates the employment relationship. If employers intend for noncompetes to continue to bind an employee post-resignation, they must specifically include language in any condition subsequent clause that the termination was at the instance of the employer. If no such language is included, the courts may decline to reform imprecise agreements and redistribute the contractually allocated risks and benefits. Accordingly, employers may wish to protect themselves by ensuring that an employee’s voluntary resignation is not a triggering event, thereby guaranteeing that the noncompete does not become ineffective upon the employee’s resignation.

E. Texas Copy Sys., Inc. v. Player, 06-16-00035-CV, 2016 WL 6638865 (Tex. App.—Texarkana Nov. 10, 2016, no. pet. h.).

shutterstock_526574593On October 27, 2016, the Fort Worth Court of Appeals affirmed a lower court’s order denying an application for temporary injunction seeking to enjoin Thomas Musgrave, the former president of Henry F. Coffeen III Management, Inc., d/b/a Coffeen Management Company (“CMC”), from competing with and soliciting its business. By doing so, the court emphasized the importance of carefully drafting noncompete and nonsolicitation provisions in employment agreements to ensure that an employee’s post-termination activities remain subject to the restrictive covenants.

CMC is an insurance agency that sells insurance products to car dealerships. Musgrave began working for CMC in 2011 as an independent contractor and, as its president, was responsible for managing CMC’s day-to-day operations. Musgrave signed a “Non-Compete Agreement” barring him from competing with CMC or soliciting its customers for a specified term. In August 2015, Musgrave began travelling to New Mexico to visit Tate Branch Automotive (“TBA”), a CMC client that owns several car dealerships. A short time later, Musgrave started assisting TBA with acquiring car dealerships. In December 2015, Musgrave resigned from CMC, but he continued to advise TBA on the acquisition of car dealerships. Continue Reading Texas Court of Appeals Finds Noncompete Agreement Inapplicable to Former President’s Post-Termination Activities Due to the Inexact Language of the Noncompete Period

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_338783330Fresh off of signing the Defend Trade Secrets Act, the White House released a report yesterday entitled “Non-Compete Reform: A Policymaker’s Guide to State Policies,” which contains information on state policies related to the enforcement of non-compete agreements. Additionally, the White House issued a “Call to Action” that encourages state legislators to adopt policies to reduce the misuse of non-compete agreements and recommends certain reforms to state law books.

The “Non-Compete Reform: A Policymaker’s Guide to State Policies,” which relied heavily on Seyfarth Shaw’s “50 State Desktop Reference: What Employers Need to Know About Non-Compete and Trade Secrets Law,” suggests that non-compete clauses have recently become more widespread, impacting 18% of all workers and 15% of employees without a college degree. The report analyzes the various states that have enacted statutes governing the enforcement of non-compete agreements and the ways in which those statutes address aspects of non-compete enforceability, including durational limitations; occupation-specific exemptions; wage thresholds; “garden leave;” enforcement doctrines; and prior notice requirements.

Continue Reading The White House’s Call to Action: A Step in the Right Direction or a Bridge Too Far?

shutterstock_312797282Earlier this fall, the U.S. District Court in Massachusetts transferred an employee’s declaratory judgment action to the Eastern District of Michigan pursuant to a forum-selection clause in a non-compete agreement over the employee’s argument that he had signed the agreement under duress because he was not told he would need to sign it until he had already spent the money and traveled all the way from India to the United States. The court also used the value of the employee’s annual salary, not just the damages the former employee was seeking to recover, to determine whether the minimum threshold for diversity jurisdiction had been satisfied, because his former employer was seeking to enforce his non-compete and keep him out of work. The case is Kurra v. Synergy Computer Solutions, Inc., No. 15-cv-13952-ADB (D. Mass.). Continue Reading Federal Court Rejects Foreign Employee’s Attempt to Avoid Forum Selection Clause on Grounds He Signed Under Duress Upon Arriving in U.S.

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