non-compete

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Decision overview

On August 7, 2020, the Fifth Circuit addressed an issue presently undecided by the Texas Supreme Court; namely, whether reformation of an overbroad non-compete restriction is appropriate, and perhaps even required, at the preliminary injunction stage or must occur as a remedy after trial upon the merits.

In reversing and remanding the contrary lower court decision that declined to reform an overboard non-compete due to an inadequate record, the Fifth Circuit held that reformation of an overly broad covenant not to compete agreement was warranted at the preliminary injunction stage. Calhoun v. Jack Doheny Companies, Inc., No. 20-20068, — F.3d —, 2020 WL 4557641 (5th Cir. Aug. 7, 2020).…
Continue Reading Fifth Circuit Holds that Reformation of Texas Non-Competes Is Authorized, and Perhaps Required, at Preliminary Injunction Stage

In a strengthening of company contractual rights, the Louisiana Legislature recently expanded its state non-compete statute by permitting a corporation, partnership, or limited liability company to enter into agreements with their shareholders, partners, or members, respectively, that prevent them from becoming employees of a competing company under certain circumstances.…
Continue Reading Louisiana Expands its Non-Compete Statute in Favor of Companies

The Massachusetts Superior Court recently held in Now Business Intelligence, Inc. v. Donahue that a temporary reassignment during a business slowdown, consisting of the addition of certain non-billable duties, does not constitute a material change invalidating a non-compete agreement. The dispute centered on Now Business Intelligence, Inc.’s (“NBI”) ability to hold its former employee, Sean Donahue (“Donahue”), liable for breach of his covenant not to compete. …
Continue Reading Massachusetts Superior Court Axes an Attempt to Expand the Scope of the Seminal Non-Compete Law Concerning Material Change in Employment

Tens of millions of employees have been laid off or furloughed as a result of the COVID-19 pandemic. Now that the reopening process has begun in most states, many of those employees are being rehired and reactivated. For the month of May 2020, the unemployment rate actually started to decline after the massive increase over the prior few months, as businesses began the return to normal and employers who obtained relief from the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) restored their workforces to pre-pandemic levels in order to secure loan forgiveness.

One thing that employers may not be considering when they rehire laid off or furloughed employees is what impact this has on prior restrictive covenant agreements with those employees. We previously discussed whether non-competes are enforceable against employees who are laid off. But what about employees who are laid off and then rehired, or furloughed and then reactivated? Are restrictive covenant agreements signed by employees prior to the layoffs or furloughs still enforceable if they ultimately leave and join a competitor down the road? The answer depends on whether the employee was technically, even if temporarily, laid off rather than furloughed, and what state’s law applies.…
Continue Reading No Good Deed Goes Unpunished: Return to Work May Mean Reduced Protections for Trade Secrets and Customer Goodwill

On June 10, 2020, at 2:00 p.m. Eastern, Erik Weibust and Michael Kippins will be presenting a free webinar for the Boston Bar Association entitled “Protecting Trade Secrets in the Face of Remote Workforces, New Technology, and Laid Off Employees.”.

As a result of the COVID-19 pandemic and in response to what many are calling…

We previously wrote about whether Peloton instructors are (or should be) subject to non-compete agreements owing to their prominent role as the “face” of the company. Today, we take a look at another “face” of Peloton (and other companies), as we consider the use of restrictive covenants for paid corporate spokespeople, such as actors who appear in company ads and “influencers” who use their social media popularity to promote products.…
Continue Reading Preventing the “Face” of Your Company from Doing an About-Face for a Competitor

As the global economy falters, a fortunate few companies have seen tremendous growth as a result of the COVID-19 crisis. Among the companies benefitting from the shelter-in-place orders currently in effect is Peloton Interactive, Inc. (“Peloton”), which manufactures and distributes home exercise equipment capable of streaming live and pre-recorded classes. Since Peloton’s IPO in late 2019, its shares have jumped over 50%, largely based on its outstanding second quarter results. As people have been shut-out of their gyms, they are frequently turning to alternatives, including Peloton, to stay active (and sane). In full disclosure, that includes the authors of this article and many of our colleagues.…
Continue Reading Avoid Spinning Your Wheels: Peloton as a Case Study in the Protection of Customer Goodwill

Seyfarth Synopsis: A recent case out of the Court of Appeals in Houston, Texas highlights the challenges in proving liability against a third-party competitor for knowing participation in breach of duty of loyalty/fiduciary duty, tortious interference with contract, and conspiracy when the third-party competitor participates in the solicitation of current employees. The Court’s opinion emphasizes that although an employee owes a duty of loyalty to her current employer, current employees can generally plan to compete—and communicate among themselves to do so—while still employed. The decision further illustrates the difficulty in proving a third-party competitor participated in any unlawful plans to compete, without some evidence showing the competitor had knowledge of the departing employees’ restrictive covenants and directing the wrongful acts. As such, the opinion demonstrates the importance of enforceable non-compete, non-solicit, and confidentiality agreements with key employees.

One of the worst case scenarios for a company is an entire team—including high level executives—jumping ship to a competitor, and directly competing against the former employer in the same space and market. A recent decision from the First Circuit Court of Appeals in Houston, Texas provides an interesting look into just such a situation, and it reinforces that it is difficult for a company to recoup its damages after a max exodus of employees if it hasn’t taken the necessary precautions ahead of time.…
Continue Reading A Herculean Task: Proving a Competitor’s Knowledge and Participation in an Unfair Competition Case

Continuing our annual tradition, we have compiled our top developments and headlines for 2019 & 2020 in trade secret, non-compete, and computer fraud law. Here’s what you need to know to keep abreast of the ever-changing law in this area.

1. Another Year, Another Attempt in Congress to Ban Non-Competes Nationwide

Senators Chris Murphy (D-Conn.) and Todd Young (R-Ind.) introduced legislation in 2019 entitled the Workforce Mobility Act (“WMA”). The WMA seeks to ban non-compete agreements outside of the sale of a business or dissolution of a partnership.

Not only would the WMA abolish covenants not to compete nationwide, outside of the extremely narrow exceptions highlighted above, but it would also provide the Department of Labor (DOL) and Federal Trade Commission (FTC) with broad enforcement power. If enacted, the legislation would empower the FTC and DOL to enforce the ban through fines on employers who either fail to notify employees that non-compete agreements are illegal or who require employees to sign covenants not to compete. Additionally, the WMA establishes a private right of action for all employees allegedly aggrieved by a violation of the WMA.

The WMA contains a carve out for parties to enter into an agreement to protect trade secrets. As currently drafted, the WMA does not abrogate the scope of protections provided by the Defend Trade Secrets Act.

Presently, there are no generally applicable federal restrictions on non-compete agreements, and enacting such a law would have to pass Constitutional muster. We expect to see continued activity at the federal legislative level to attempt to ban or limit the use of non-competes.

2. New State Legislation Regarding Restrictive Covenants

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Continue Reading Top 10 Developments and Headlines in Trade Secret, Non-Compete, and Computer Fraud Law for 2019 & 2020

For the first time in 15 years, the Supreme Judicial Court (“SJC”), Massachusetts’ highest court, issued a decision analyzing the enforceability of non-solicitation covenants, the distinction between such covenants in the context of the sale of a business versus employment, and equitable tolling of restrictive covenants. As set forth below, this decision serves as an important reminder to businesses who impose restrictive covenants governed by Massachusetts law.

Factual Background

While the factual background of the case is long and twisty, only a few key details are necessary to rehash here. The defendant Matthew McGovern (“McGovern”) entered into a restrictive covenants agreement with his former co-shareholders of the Prime Motor Group (“Prime”), in exchange for plaintiffs’ agreement to buy out McGovern’s minority share in Prime with no discount. The agreement, which was made a year after McGovern had been terminated as an employee and as part of a resolution of the parties’ dispute concerning McGovern’s alleged violation of an earlier restrictive covenants agreement, prohibited McGovern from hiring, soliciting, or encouraging Prime employees to leave Prime for 18 months. The agreement contained no tolling provision, but provided that plaintiffs would be entitled to injunctive relief if McGovern breached, without needing to prove irreparable harm.  …
Continue Reading Massachusetts’ High Court Pumps the Brakes on Equitable Tolling of Restrictive Covenant