Businesses are constantly challenged by the ever-evolving landscape of labor and employment law, with new legislation and judicial developments occurring almost daily fueling a seemingly never-ending stream of litigation. For companies operating in multiple states, complying with this patchwork of federal, state, and local laws and developments can be daunting. Knowing these issues are a top concern for management and in-house counsel, Morrison Foerster keeps pace with this rapidly evolving landscape. MoFo ELC equips our clients with the most up-to-date and relevant information on employment and labor law issues covering key judicial, litigation and legislative developments, their implications for employers, and strategies to ensure compliance and avoid lawsuits.<h2>ABOUT MORRISON FOERSTER</h2>Morrison Foerster is a leading global law firm that transforms complexity into advantage for its clients. Our clients include some of the largest financial institutions, banks, consulting and accounting firms, and Fortune 100, technology, and life sciences companies. Highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture, Morrison Foerster has been repeatedly recognized as one of the top 10 firms on The American Lawyer’s A-List. Year after year, the firm receives significant recognition from Chambers and The Legal 500 across their various guides, including Global, USA, Asia‑Pacific, Europe, UK, Latin America, and FinTech Legal. Our lawyers passionately care about delivering legal excellence while living our values. Morrison Foerster has a long-standing commitment to creating a culture that respects and celebrates differences, while providing an inclusive environment. The firm has achieved Mansfield Certification Plus since 2018 as a result of successfully reaching at least 30 percent women, communities of color, and LGBTQ+ lawyer representation in a notable number of current leadership roles and committees. The firm also has a long history of commitment to the community and society through providing pro bono legal services, including litigating for civil rights and civil liberties, improving public education and fostering the wellbeing of children, advocating for veterans, promoting international human rights, enforcing the right to asylum, and safeguarding the environment.

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Co-Chair, Global Employment and Labor Practice

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Andrew Turnbull represents companies on a broad range of labor and employment litigation and counseling matters. He has successfully defended clients in complex employment litigation before federal and state courts and administrative agencies. A primary focus of his practice involves helping companies navigate the unique employment issues that arise when doing business with the federal government, including advising on all aspects of OFCCP compliance, creating and implementing affirmative action plans, defending OFCCP audits and onsite investigations, conducting mock pay equity audits, drafting and developing business ethics policies and programs, and complying with the Service Contract Act, E-Verify, and the Drug Free Workplace Act.

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MoFo ELC equips our clients with the most up-to-date and relevant information on employment and labor law issues, covering key judicial, litigation, and legislative developments, their implications for employers, and strategies to ensure compliance and avoid lawsuits. To learn more about our capabilities, please visit the <a href="https://www.mofo.com/capabilities/employment-labor" target="_blank">Employment + Labor</a> practice page and read about our <a href="https://www.mofo.com/people?practices=Employment%20%2B%20Labor" target="_blank">Team</a>.

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DOJ Creates Initiative to Pursue Aggressive False Claims Act Enforcement Against DEI Programs and Civil Rights Violations

Fourth Circuit Stays Injunction of Trump DEI Executive Orders

President Trump Rescinds Affirmative Action for Federal Contractors and Requires Enforcement Plan to End Unlawful DEI at Private Companies

FAR Council Withdraws “Pay Equity and Transparency” Proposed Rule

The “Preventative Duty”: New Law Places Active Duty on Employers in the UK to Prevent Sexual Harassment in the Workplace

The General Counsel for the National Labor Relations Board (the “NLRB”) recently issued Memorandum GC 23-05 (the “Memorandum”), expansively interpreting the reach of the McLaren Macomb (“McLaren”) decision and raising more questions about how companies can lawfully use non-disparagement and confidentiality clauses going forward. As we previously reported, in McLaren, the NLRB found that non-disparagement and confidentiality provisions in a severance agreement violated the National Labor Relations Act (“NLRA”), where those provisions had “a reasonable tendency” to interfere with employee NLRA Section 7 rights. Although the Memorandum clarifies some points from McLaren, the General Counsel provides no examples of lawful confidentiality and non-disparagement provisions and seeks to expand the reach of McLaren beyond the facts of that case to cover other types of employment agreements and provisions. Companies should carefully consider the Memorandum when drafting, offering, or enforcing non-disparagement and confidentiality provisions with current and former employees.Read our <a href="https://www.mofo.com/resources/insights/230410-nlrb-gc-broad-view-mclaren-macomb-decision" target="_blank">client alert</a>.

NLRB GC Takes Broad View of the McLaren Macomb Decision

Andrew co-chairs the firm’s Global Employment and Labor Group. He represents companies on a broad range of labor and employment litigation and counseling matters, successfully defending clients in number complex matters before federal and state courts and administrative agencies.

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NLRB GC Takes Broad View of the McLaren Macomb Decision

New Guidance on COVID-19 Protocols for Contractor Employees at Federal Facilities

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The General Counsel for the National Labor Relations Board (the “NLRB”) recently issued Memorandum GC 23-05 (the “Memorandum”), expansively interpreting the reach of the McLaren Macomb (“McLaren”) decision 

The FTC’s Notice of Proposed Rulemaking of its Non-Compete Clause Rule, which would ban non-competes altogether if promulgated, opened 2023 with a bang. Whether it goes into effect, in what form, and whether the Rule will survive the legal challenges it will encounter, all remain to be seen and likely will not be resolved for many months, if in 2023 at all.<a href="#_ftn1" target="_self" id="_ftnref1">[1]</a> In the meantime, employers still need to contend with the ever-evolving world of non-compete law in the United States. The year 2022 saw an ongoing trend of legislatures passing laws intended to narrow the scope of non-competition agreements but courts—including in California, which may be a surprise for some to hear—continuing to enforce them. Meanwhile, other courts continued grappling with important issues—such as sale of business criteria and under what circumstances may a sale-of-business non-compete be unenforceable—that are already important now and will become even more so if the FTC’s proposed ban goes into effect. Other decisions dealt with evergreen issues such as contract interpretation and blue penciling. And still others considered the ever-increasing importance of California’s choice-of-law and choice-of-forum exception codified in California Labor Code Section 925(e). Below is a summary of some key non-compete highlights from 2022.<ul><li>Lawmakers Narrow Non-Competes. Colorado, the District of Columbia (D.C.), and Illinois are among the jurisdictions where new laws narrowing the reach of non‑competition agreements for employees went into effect in 2022. Among other limitations, Colorado law was amended to bar non-competes for employees earning less than $101,250 and to require a non-compete agreement be given to an employee before starting employment or at least 14 days before going into effect for current employees. The D.C. law bars non-competes for employees earning less than $150,000 annually and requires employees be given at least 14 days’ notice to review a non-compete before it goes into effect. The Illinois statute bars non-competes for employees earning less than $75,000 per year, imposes a 14-day notice requirement, and requires adequate consideration of at least two years of employment or financial benefits (which are not defined but presumably include raises, bonuses, stock grants, promotions). Notwithstanding any choice of law provision to the contrary, each of these jurisdictions will apply its law to a non-compete entered into by an employee who lives or works in the jurisdiction. Non-competes entered into in exchange for the sale of a business continue to be enforceable in each of the jurisdictions despite these new laws.<a href="#_ftn2" target="_self" id="_ftnref2">[2]</a></li><li>Delaware Chancery Court Refuses to Enforce or Blue-Pencil Overbroad Deal Non‑Compete. Sale of business non-competes are generally afforded greater deference and are often exempted from statutory restrictions. But in Kodiak Building Partners, LLC v. Adams, 2022 WL 5240507 (Del.Ch. Oct. 6, 2022), a recent Delaware Chancery Court case served as a reminder that greater deference does not always mean enforceability, even in a contractarian jurisdiction such as Delaware. Surprising many, the Delaware Chancery Court in early October 2022 both (a) struck down a sale of business non‑compete the court found to have been overbroad because the non-compete barred the seller from competing not only with the business it sold, but also the buyer’s other businesses, and (b) declined to exercise the court’s discretion to blue-pencil and enforce a trimmed-down version of the non-compete that may have been found more reasonable.<a href="#_ftn3" target="_self" id="_ftnref3">[3]</a> Although the court recognized that buyers have legitimate interests under Delaware law to prohibit sellers from competing “in the relevant industry” and conceded that the seller was violating the non-compete, the court drew a line between the goodwill of the seller’s business (a legitimate interest) and the existing goodwill of the buyer’s (not a legitimate interest), at least insofar as the buyer’s goodwill concerned industry “segments” different from what it was getting from the seller through the transaction. Even though the court had the option to blue-pencil it, the court declined to do so, suggesting that the employee who sold his share of the business for around $1 million had unequal bargaining power and it would not be equitable to blue-pencil under those circumstances.<a href="#_ftn4" target="_self" id="_ftnref4">[4]</a></li><li>California Courts Enforce Sale of Business Non-Compete Against Seller Tied to Termination of Employment (Not Closing Date). Ten years ago in Fillpoint, a California appellate court refused to enforce a sale of business non-compete that defined the duration as the longer of X years from closing or Y years from the seller’s termination of employment. Fillpoint, LLC v. Maas, 208 Cal. App. 4th 1170, 1182-83 (2012). Since then, there has been a trend in California deals where the duration of the seller’s non‑compete is only defined as X years from closing. In 2022, however, two California state and federal court judges enforced sale of business non-competes where the seller was barred from competing with the buyer for Y years from the seller’s termination of employment. In the first case, Blue Mountain, the court enforced a three-year nonsolicit tied to termination of seller’s employment that was entered into in connection with transfer of ownership interest. Blue Mountain Enterprises, LLC. v. Owen, 74 Cal. App. 5th 537 (2022). “The validity of that covenant,” the court held, “is not affected by its location in the employment contract rather than the merger agreement.” “The purpose of the statute is served as long as the covenant is executed in connection with the sale or disposition of all of the shareholder's stock in the acquired corporation.” at 553.</li></ul>The second case, Arthur Gallagher, involved two non-competes—one in a sale purchase agreement and one in an employment agreement, both of which were entered into at time of sale—just like Fillpoint. Arthur J. Gallagher & Co. v. Petree, 2022 WL 1241232 (E.D. Cal. Apr. 27, 2022). Relying on Fillpoint, the employee argued that the non‑competes were unenforceable because the term did not run from the time of sale but instead prohibited him from soliciting his former employer’s customer two years after his employment ended. The court disagreed. Fillpoint was distinguishable, the court found, because in Fillpoint the two non-competes were distinct, whereas here they were identical. “The distinction [between the two non-competes in Fillpoint] mattered because the latter targeted the defendant's right to pursue his profession, whereas the purchase agreement was focused on the acquired goodwill.” The court also relied on the fact that “the parties specifically agreed the express purpose of those restrictive covenants was to ‘protect the Personal Goodwill Assets, business and other Property’ that AJG was purchasing from Petree, and that they were ‘reasonably necessary and tailored to protect [Gallagher's] legitimate business interests.’” Arthur J. Gallagher, 2022 WL 1241232, at *3 (E.D. Cal. Apr. 27, 2022). The defendant apparently tried to argue that the scope of the non-compete was broader than needed to protect the purchased goodwill, but that, too, the Gallagher court found unpersuasive.    <ul><li>Massachusetts Court Clarifies Sale of Business Exception. Even before the FTC’s proposed rule, the scope of the sale-of-business exception has long been an important and at times slippery issue, as a sale of business can take various forms. What if an employer effectively purchases a “book of business” from one of its employees? Can a non‑compete entered into in connection with that sort of transaction qualify as a sale of business? According to one Massachusetts court in July 2022, the answer would be no, at least not when it involves converting an employee’s right to receive a commission to a fixed salary. Lighthouse Insurance Agency, Ltd v. Lambert, involved a licensed insurance producer who sold insurance on commission—40% for new business and 40% for any renewals by those accounts. In 2020, his employer asked him to enter in a new employment agreement with a new compensation structure, with an $80k salary plus 40% commission for new accounts originated by him. The employer characterized this new compensation arrangement as involving the purchase and sale of the employee’s “book of business.” The court disagreed. “The right to commission payments from the insurers on those accounts belonged to [the employer],” the court observed. And “[the employee] could not sell or assign any interest in those accounts to [the employer] or to anyone else.” All the employer was really doing, as the court saw it, “was converting [the employee’s] continuing right to receive a share of [the employer’s] commissions on the accounts [the employee] had brought to the agency into a new right to receive a fixed salary plus a small portion of the commissions to which [the employee] had previously been entitled.” Even assuming this would have qualified as a “book of business,” the court suggested that it still would have fallen short. The Massachusetts statute defines non-compete to exclude agreements “made in connection with the sale of a business entity or substantially all of the operating assets of a business entity or partnership, or otherwise disposing of the ownership interest of a business entity or partnership, or division or subsidiary thereof, when the party restricted by the noncompetition agreement is a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale or disposal.” See G.L. c. 149, § 24L(a). And the employer had not argued that a “book of business” was a “business entity” or assets of a “business entity or partnership.” <a href="https://faircompetitionlaw.com/wp-content/uploads/2022/06/09-066-22.pdf" target="_blank">https://faircompetitionlaw.com/wp-content/uploads/2022/06/09-066-22.pdf</a></li></ul><ul><li>Federal Court Applies Janitor Rule In Georgia. Georgia, like some other jurisdictions, recognizes what is known as the janitor rule, e., that a non-compete may be unreasonable and thus unenforceable if it prohibits an employee from working in any capacity for a competitor, even in a non-competitive capacity, such as a janitor. The non‑compete in this case defined “prohibited activity” as “activity to which I contribute my knowledge, directly or indirectly, in whole or in part, as an employee, employer, owner, operator, manager, advisor, consultant, agent, partner, director, stockholder, officer, volunteer, intern or any other similar capacity to an entity engaged in the same or similar business as AmSpec.” Did “knowledge” necessarily cabin the clause, such that the employee was prohibited from working only in a capacity in which he used the knowledge he gained from his prior employer? No, the court held. Relying on the dictionary definition of “knowledge,” the court found that “knowledge” was all‑encompassing and that meant “Defendant cannot directly or indirectly give or supply to any competitor of AmSpec any of the facts and other things that the Defendant is aware of, regardless of when or how he became aware of them.” Because that effectively prohibited the former employee from working in any capacity, it was unreasonable and thus unenforceable. Georgia is a blue-pencil jurisdiction like Delaware, but as was the case in Kodiak, that did not save the non-compete. In the court’s view, its blue-penciling powers were limited to striking unreasonable restrictions or narrowing over-broad territorial designations. But adding the language “learned while employed by Plaintiff” to the Agreements would create a limitation from “whole cloth” and the court would be rewriting the agreements to save an otherwise unenforceable clause. AmSpec, LLC v. Calhoun, 2022 WL 17740307, at *7 (S.D. Ga. Dec. 16, 2022).</li></ul><ul id="_ftnref6"><li id="_ftnref6">Courts Provide More Clarity on California Labor Code Section 925(e)’s Potential Application to Silicon Valley and Other California Non-Competes.<ul id="_ftnref6"><li>Effective January 1, 2017, California Labor Code Section 925 required any agreements signed as a condition of employment in California to be governed by California law and allowed any such agreements not designating California law to be voided at the option of the employee. The new law included an exception, subsection (e), which on its face allowed an employee who was represented by counsel in the negotiation of such an employment-related agreement to select another state’s law to govern the agreement.</li><li id="_ftnref5">In 2018, the Delaware Chancery Court invoked Labor Code Section 925(e) to enforce a non-compete against a California executive on the basis of a Delaware choice of law provision in the non-compete.<a href="#_ftn5" target="_self" id="_ftnref5">[5]</a></li><li>More recently, in 2021, the federal court for the Southern District New York applied a Delaware choice of law provision in a non-compete over the objection of an executive who argued that Section 925 required the application of California law, where the Court was convinced the executive in fact had been represented by legal counsel in the negotiation of the non-compete.</li><li id="_ftnref6">While they did not actually apply a non-California state’s law to enforce the non‑compete under Section 925(e), at least two California courts in 2022 issued rulings indicating they may have done so if the evidence that the California executive was represented by counsel in negotiating the non-compete had been more persuasive. In fact, one of those courts, the Ninth Circuit Court of Appeals, went so far as to find that, with respect to a California employee who is represented by legal counsel, “Such an employee is free to negotiate whatever forum-selection clause they want.”<a href="#_ftn6" target="_self" id="_ftnref6">[6]</a></li></ul></li></ul> We can only expect further non-compete developments in 2023 and beyond, and the MoFo team will report on them as they arise. Stay tuned!<a href="#_ftnref1" target="_self" id="_ftn1">[1]</a> See <a href="https://www.hr.com/en/magazines/legal_compliance_excellence_essentials/february_2023_hr_legal_compliance_excellence/ftc%E2%80%99s-proposed-ban-on-non-compete-clauses-implicat_ldn088g1.html?s=OjtVZXhshso43Lsbu" target="_blank">https://www.hr.com/en/magazines/legal_compliance_excellence_essentials/</a><a href="https://www.hr.com/en/magazines/legal_compliance_excellence_essentials/february_2023_hr_legal_compliance_excellence/ftc%E2%80%99s-proposed-ban-on-non-compete-clauses-implicat_ldn088g1.html?s=OjtVZXhshso43Lsbu" target="_blank">february_2023_hr_legal_compliance_excellence/ftc%E2%80%99s-proposed-ban-on-non-compete-clauses-implicat_ldn088g1.html?s=OjtVZXhshso43Lsbu</a><a href="#_ftnref2" target="_self" id="_ftn2">[2]</a> See, e.g., <a href="https://www.mofo.com/resources/insights/220721-dc-council-waters-down-non-compete-ban" target="_blank">https://www.mofo.com/resources/insights/220721-dc-council-waters-down-non-compete-ban</a> and <a href="https://www.mofo.com/resources/insights/210630-illinois-ushers-new-restrictions">https://www.mofo.com/resources/insights/210630-illinois-ushers-new-restrictions</a>.<a href="#_ftnref3" target="_self" id="_ftn3">[3]</a> See <a href="https://elc.mofo.com/topics/delaware-court-refuses-to-enforce-or-blue-pencil-sale-of-business-non-compete" target="_blank">https://elc.mofo.com/topics/delaware-court-refuses-to-enforce-or-blue-pencil-sale-of-business-non-compete</a>.<a href="#_ftnref4" target="_self" id="_ftn4">[4]</a> Those wondering whether Kodiak could be an outlier or a start of a broader trend in Delaware should note the recent case of Ainslie v. Cantor Fitzgerald, L.P., 2023 WL 106924, at *8 (Del. Ch. Jan. 4, 2023), in which the court found a non-compete in a limited-partnership agreement to be unenforceable, along with a “conditioned payment device,” which the court found to be an unenforceable forfeiture for competition. See <a href="https://elc.mofo.com/topics/delaware-court-refuses-to-enforce-or-blue-pencil-sale-of-business-non-compete" target="_blank">https://elc.mofo.com/topics/delaware-court-refuses-to-enforce-or-blue-pencil-sale-of-business-non-compete</a> for more information.<a href="#_ftnref5" target="_self" id="_ftn5">[5]</a> Several months later, that executive presented evidence clarifying that he in fact was not represented by legal counsel, and the Chancery Court reversed its decision and declined to enforce the non-compete against the California executive. See Nuvasive, Inc. v. Miles, 2019 Del. Ch. LEXIS 325, 2019 WL 4010814.<a href="#_ftnref6" target="_self" id="_ftn6">[6]</a> Depuy Synthes Sales, Inc. v. Howmedica Osteonics Corp., 28 F.4th 956, 964 (9th Cir. 2022).

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Eric Akira Tate co-chairs the firm’s Global Employment and Labor Group. He represents technology and other companies in bet-the-company trade secrets and employee mobility cases.

Eric Akira Tate

Eric Tate chairs the firm’s Global Employment and Labor Group. He has represented technology and other companies in the biggest and most highly-publicized trade secrets and employee mobility cases across multiple industries. Eric also represents companies in whistleblower, wage and hour, and other employment litigation.

Eric Tate

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Michael Schulman is a partner in the firm’s Global Employment and Labor Group and co-head of the firm’s Washington, D.C. Litigation Department.

Michael Schulman

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Cooper Spinelli is a member of the Litigation Department and part of the firm’s Employment & Labor Group. His practice focuses on trade secrets and restrictive covenants, employee mobility and executive disputes, whistleblower claims, and general business litigation.

Cooper J. Spinelli

Cooper Spinelli

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Recent Non-Compete Trends: Courts Continue to Enforce Non-Competes While Politicians Seek to Narrow Them

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The FTC’s Notice of Proposed Rulemaking of its Non-Compete Clause Rule, which would ban non-competes altogether if promulgated, opened 2023 with a bang. Whether it goes into effect, in what form, and whether the Rule will survive the legal challenges it will encounter, all remain to be seen and likely will not be resolved for many months, if in 2023 at all.

Recent Non-Compete Trends: Courts Continue to Enforce Non-Competes While Politicians Seek to Narrow Them

On March 16, 2023, the Delaware Chancery Court in Intertek Testing Services NA, Inc. v. Eastman found a sale-of-business non-compete was overbroad, given its worldwide geographic scope, and refused to modify it to make it enforceable. Intertek marks the third time in less than six months that a Delaware state court has refused to enforce or modify a non-compete under the more lenient sale-of-business standard. These cases signal a potential trend of Delaware state courts more closely scrutinizing non-competes under the sale-of-business standard to determine if they go beyond the legitimate business interests of the party seeking enforcement. Where overbreadth is found, these courts appear increasingly hesitant to modify or blue pencil the restrictions to make them enforceable. Companies should be mindful of these cases when drafting and enforcing sale-of-business non-competes governed by Delaware law.Read our <a href="https://www.mofo.com/resources/insights/230331-delaware-cases-stricter-review-sale-business-non-competes" target="_blank">client alert</a>.

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Trio of Delaware Cases Signal Stricter Review of Sale-of-Business Non-Competes

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On March 16, 2023, the Delaware Chancery Court in Intertek Testing Services NA, Inc. v. Eastman found a sale-of-business non-compete was overbroad, given its worldwide geographic scope, and refused to modify it to make it enforceable.

Trio of Delaware Cases Signal Stricter Review of Sale-of-Business Non-Competes

With the U.S. Supreme Court seemingly poised to end affirmative action for college admission programs, many U.S. employers are wondering whether or to what extent they can continue their diversity, equity, and inclusion (DEI) and affirmative action programs. Although a Court decision ending or limiting the use of affirmative action for university admissions will not likely have direct application to workplace DEI and affirmative action programs, companies may be indirectly impacted by the decision, including through potential legal challenges to their programs. Employers are also increasingly having to navigate the growing trend of state legislation and measures seeking to limit workplace DEI efforts. In light of these trends and the anticipated Court decision, employers should:<ul><li>anticipate increased challenges to their DEI and affirmative action programs;</li></ul><ul><li>monitor state legislation and regulation aimed at restricting workplace DEI training, policies, and practices; and</li><li>review their existing DEI and affirmative action programs to determine if they might be vulnerable to attack.</li></ul>Read our <a href="https://www.mofo.com/resources/insights/230329-are-workplace-diversity-programs-in-jeopardy?utm_source=publication&utm_medium=email" target="_blank">client alert</a>.

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Carrie H. Cohen, partner, has deep experience in white collar defense, FCPA compliance, federal prosecutions, workplace misconduct, and securities enforcement.

Carrie H. Cohen, partner, has deep experience in white collar defense, FCPA compliance, federal prosecutions, workplace misconduct  and securities enforcement.

Carrie H. Cohen

Carrie H. Cohen | White Collar Crime + FCPA Lawyer

Carrie H. Cohen has a distinguished record of success in the courtroom handling high‑stakes litigation, with a particular focus on white-collar and securities cases. She is the co-chair of the Women’s Strategy Committee.

Carrie Cohen

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Associate

Melissa Harclerode is an associate in Morrison Foerster’s Employment + Labor Group in the Washington, D.C. office.

Melissa M. Harclerode

Melissa Harclerode

Are Workplace Diversity Programs in Jeopardy if the Supreme Court Ends Affirmative Action in College Admissions?

With the U.S. Supreme Court seemingly poised to end affirmative action for college admission programs, many U.S. employers are wondering whether or to what extent they can continue their diversity, equity, and inclusion (DEI) and affirmative action programs

Are Workplace Diversity Programs in Jeopardy if the Supreme Court Ends Affirmative Action in College Admissions?

In a reversal of Trump-era National Labor Relations Board (the “Board”) precedent, the Board found last week in McLaren Macomb that non-disparagement and confidentiality provisions in a severance agreement violate the National Labor Relations Act (“NLRA”) if those provisions have “a reasonable tendency” to interfere with an employee’s NLRA Section 7 rights. The Board also held that merely offering an agreement with such provisions to an employee is unlawful, even if the employee does not sign it or the employer does not enforce it.Read our <a href="https://www.mofo.com/resources/insights/230228-nlrb-limits-use-of-non-disparagement" target="_blank">client alert</a>.

NLRB Limits Use of Non-Disparagement and Confidentiality Provisions

In a reversal of Trump-era National Labor Relations Board (the “Board”) precedent, the Board found last week in McLaren Macomb that non-disparagement and confidentiality provisions in a severance agreement violate the National Labor Relations Act (“NLRA”) if those provisions have “a reasonable tendency” to interfere with an employee’s NLRA Section 7 rights.

NLRB Limits Use of Non-Disparagement and Confidentiality Provisions

In a reversal of its prior ruling, the Ninth Circuit recently held that the Federal Arbitration Act (FAA) preempts California Assembly Bill 51 (AB 51), a 2019 measure that aimed to bar employers from entering into new agreements—or extending previous ones—requiring job applicants or workers to arbitrate claims under the California Labor Code or California Fair Employment and Housing Act (FEHA).Read our <a href="https://www.mofo.com/resources/insights/230216-ninth-circuit-reverses-itself" target="_blank">client alert</a>.

Ninth Circuit Reverses Itself and Strikes Down California Law Targeting Mandatory Employment Arbitration Agreements

In a reversal of its prior ruling, the Ninth Circuit recently held that the Federal Arbitration Act (FAA) preempts California Assembly Bill 51 (AB 51), a 2019 measure that aimed to bar employers from entering into new agreements—or extending previous ones—requiring job applicants or workers to arbitrate claims under the California Labor Code or California Fair Employment and Housing Act (FEHA).

Ninth Circuit Reverses Itself and Strikes Down California Law Targeting Mandatory Employment Arbitration Agreements

With a potential recession looming and a growing number of companies announcing significant layoffs almost daily, employers are increasingly considering reductions in force (RIFs) to weather the financial uncertainty in the markets. Although RIFs can be a necessary measure to preserve financial resources and help to refocus business priorities, RIFs can present significant legal and business risks and require thoughtful and careful planning. Employers anticipating a RIF for their U.S. workforce should be prepared to address the following key considerations to help navigate and potentially mitigate the risks associated with a layoff.Read our <a href="https://www.mofo.com/resources/insights/230213-key-considerations-for-navigating-workforce-reductions" target="_self">client alert</a>.

Key Considerations for Navigating Workforce Reductions During Uncertain Economic Times

Key Considerations for Navigating Workforce Reductions During Uncertain Economic Times

With a potential recession looming and a growing number of companies announcing significant layoffs almost daily, employers are increasingly considering reductions in force (RIFs) to weather the financial uncertainty in the markets. 

With California’s new pay transparency and pay reporting obligations under S.B. 1162 now in effect, employers are seeking answers on various open questions for complying with the new law. As we previously reported, S.B. 1162 requires employers with 15 or more employees to include pay scale information in each job posting for positions in California, as well as disclose information to current California employees upon request. Failure to comply with these requirements can result in significant civil penalties (ranging from $100 to $10,000 per violation) and possible government investigations or private lawsuits.  Read our <a href="https://www.mofo.com/resources/insights/230117-new-guidance-on-californias-pay-transparency-law" target="_self">client alert</a>.

New Guidance on California's Pay Transparency Law

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New Guidance on California's Pay Transparency Law

Practical Considerations for Navigating the Upcoming Federal Ban on Predispute Arbitration and Class Action Waivers of Sexual Harassment and Assault Claims

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With California’s new pay transparency and pay reporting obligations under S.B. 1162 now in effect, employers are seeking answers on various open questions for complying with the new law.

On January 20, 2023, the Office of Federal Contract Compliance Programs (OFCCP) published a list of 500 contractor establishments scheduled to receive advance audit notices known as Corporate Scheduling Announcement Letters (CSALs). CSALs are courtesy letters that OFCCP sends to federal contractors and subcontractors to alert them that one or more of their establishments will likely be scheduled for an OFCCP audit in the coming months. Contractors receiving CSALs are typically scheduled for audits, so they provide a good opportunity for contractors on the CSAL list to check their practices to make sure they are prepared for an audit.  Read our <a href="https://www.mofo.com/resources/insights/230123-ofccp-releases-new-audit-list-for-2023" target="_self">client alert</a>.

OFCCP Releases New Audit List for 2023

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OFCCP Releases New Audit List for 2023

OFCCP Signals Return to More Aggressive and Less Transparent Audits

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On January 20, 2023, the Office of Federal Contract Compliance Programs (OFCCP) published a list of 500 contractor establishments scheduled to receive advance audit notices known as Corporate Scheduling 

20 second read: While courts generally appear to give greater deference to enforcement of sale of business non-competes, at least one Delaware court confirmed that if a court thinks the restrictions go beyond the scope of the business being sold, it may refuse to enforce the non-compete and strike it in its entirety without blue-penciling. A consideration for parties when drafting sale of business non-competes.From the pending <a href="https://www.congress.gov/bill/117th-congress/senate-bill/2375/text">Freedom to Compete Act</a> and potential upcoming initiatives at the <a href="https://www.mofo.com/resources/insights/220805-doj-and-ftc-enter-separate-mous">Federal Trade Commission</a>, to laws recently passed from Washington, to <a href="https://elc.mofo.com/topics/preparing-for-colorados-new-limits-on-employee-non-competes">Colorado</a> to Massachusetts to the <a href="https://elc.mofo.com/topics/dc-council-waters-down-non-compete-ban-while-keeping-some-significant-limitations">District of Columbia</a> and in multiple states in between, there has been an increasing trend across the country in restrictions being placed on non-competes in the employment context. Non-competes in the sale of business context, however, have continued to withstand this trend.  Even jurisdictions such as California that ban or drastically limit non-competes in the employment context allow non-competes in the sale of the business context (with some limitations). Otherwise, courts in general tend to apply a less searching standard for determining the reasonableness of sale of business non-competes, which favors enforcement, since the restricted individuals are selling their business, including their businesses’ confidential information, trade secrets, and goodwill, usually in exchange for significant monetary and other consideration.  As a practical matter, many non-competes in the sale of business context are also governed by Delaware law because, among other reasons, Delaware is a popular state for incorporating companies and generally viewed as being favorable to businesses.In the recent decision of Kodiak Building Partners, LLC v. Adams, 2022 WL 5240507 (Del. Ch. Oct. 6, 2022), however, the Delaware Court of Chancery struck down a sale of business non-compete and refused to blue pencil it because the non-compete sought to prohibit the seller from competing against both the buyer’s existing businesses and what the buyer acquired in the sale.  Despite there being no dispute that the restricted seller breached the non-compete by joining a competitor operating in the same industry as the sold business, the court reasoned that the buyer could not show a legitimate interest to support barring the seller from competing against all of the buyer’s existing businesses in the company group, even though many of those entities were in the same industry as the business that was sold.  And rather than blue pencil it, the court struck it down altogether.BackgroundThe case arose out of what appears to have been a relatively small transaction, in which the plaintiff, Kodiak Building Partners, entered into a stock purchase agreement with Northwest Building Components and Mandere Construction, Inc. (“Northwest”).  Kodiak purchased the companies directly from Northwest’s four stockholders.  One of the stockholders, defendant Philip Adams, was a general manager for Northwest.  Adams received around $1 million in the transaction for the 8.33% interest he held in Northwest.In connection with the deal, Kodiak entered into non-compete agreements with Adams, where Adams agreed to the following non-compete in favor of Kodiak and its subsidiaries and affiliates (together defined as the “Company Group”):Non-Competition.... Adams ... for a period of 30 months beginning on the date hereof (as applicable, the “Restricted Period”), agrees not to ... anywhere in the states of Idaho and Washington, and within a 100 mile radius of any other location outside of those states in which [Northwest, MCI,] or any member of the Company Group have sold products or provided services within the 12 months prior to Closing (the “Territory”), own, manage, operate, control, or participate in the ownership, management, operation or control of, or carry on, be engaged in, permit his, her or its name to be used in connection with, have any financial or other interest in or be otherwise commercially involved in (including as a lender or a donor), any endeavor, activity or business which is similar to or is in competition with the Business or any part of it, or provide any service to any business or Person engaged in the Business....As part of the non-compete, Adams acknowledged the agreement was reasonable and that he was waiving as a defense any issue of reasonableness.It appears that six of the Company Group members provide similar services or products as Northwest: roof trusses.  Id. at *10.  The rest of the Company Group members apparently provide different but related services concerning home improvement, such as “manufacturing, marketing, selling, distributing, installing and/or delivering ... floor and stair components; framing; siding and other building materials and supplies, and providing services with respect thereto, including design, engineering, turn-key solutions, project management and trade coordination services.”  Id. at *12.A little over a year after closing, Adams left Northwest to become general manager of one of its competitors, Builders First Source, Inc. (BFS), which is also a supplier of roof trusses, at a location about 24 miles from where he worked for Northwest.  Shortly thereafter, Kodiak filed a complaint for breach of contract against Adams and moved for a preliminary injunction.  Id. at *3.DecisionIn its briefing, Kodiak pointed to Adams’s failure to cite a single case from Delaware or elsewhere where a court found a sale of business non-compete to be unenforceable.<a href="#_ftn1" target="_self" id="_ftnref1">[1]</a>  The Kodiak court, however, proceeded to do just that, finding the non-compete to be unenforceable because its scope was not supported by a legitimate interest and refusing to blue pencil the restriction to make it enforceable.<ul><li>Agreement Not to Challenge Non-compete Not Sufficient for Injunction: Kodiak argued that it was entitled to an injunction because Adams had stipulated in the non-compete that he would not challenge the reasonableness of the non-compete as a defense.  The court disagreed. Despite acknowledging Delaware’s contractarian nature and acknowledging that there was no authority on point, the court found that “an employee’s promise not to challenge the reasonableness of his restrictive covenants cannot circumvent this Court’s mandate to review those covenants for reasonableness.” </li><li>No Legitimate Interest to Protect Competition Against the Company Group: Kodiak argued that the non-compete was enforceable because: (1) Kodiak had “a legitimate interest in protecting not only Northwest and MCI’s goodwill, but also that of Kodiak, other members of the Company Group, and the Business” and, in the alternative, (2) the non-compete was needed to protect all confidential information about the entire business from misuse. Despite Kodiak demonstrating that Adams knew and had access to confidential information belonging to Northwest and several members of the Company Group, the court found that Kodiak did not have a legitimate interest in enforcing the non-compete to prevent competition against members of the Company Group, other than Northwest. Although the court recognized that buyers have legitimate interests under Delaware law to prohibit sellers from competing “in the relevant industry” and conceded that Adams was violating the non-compete, the court proceeded to draw a line between the goodwill of the seller’s business and the existing goodwill of the buyer’s, at least insofar as the buyer’s goodwill concerned industry “segments” different from what it was getting from the seller through the transaction. The court reasoned:</li></ul><ul><li>Restrictive covenants in connection with the sale of a business legitimately protect only the purchased asset’s goodwill and competitive space that its employees developed or maintained. The acquirer’s valid concerns about monetizing its purchase do not support restricting the target’s employees from competing in other industries in which the acquirer also happened to invest. Kodiak’s legitimate economic interest supporting a restrictive covenant binding a Northwest employee and stockholder does not extend to goodwill and competitive space acquired in other transactions with other Company Group members in other industry segments.</li></ul><ul><li>Court Declined to Blue Pencil: Unable to persuade the court to enforce the non-compete in its entirety, Kodiak asked the court to blue pencil and enforce it as modified. Although the court acknowledged that Delaware is a blue-pencil state, where courts have discretion to modify overbroad non-competes, it declined to exercise that discretion, striking down the entire non-compete.  In doing so, the court relied on cases in the employment context (rather than the sale of the business context), appearing to suggest that Adams had unequal bargaining power with Kodiak. The court also seemed to suggest that it is not appropriate to blue pencil a non-compete in a preliminary injunction order, quoting the following language from a Delaware Supreme Court opinion: “[t]o blue-pencil a contract ... is not an appropriate exercise of equitable authority in a preliminary injunction order.”  Id. at n. 49 (citing C & J Energy Servs., Inc. v. City of Miami Gen. Employees’, 107 A.3d 1049, 1072 (Del. 2014)).  But the full quote from that case indicates that, instead of adopting a categorical rule, the Delaware Supreme Court was taking issue with the manner in which it had been applied—namely blue penciling “to excise a provision beneficial to a third party.”  C & J Energy Servs., Inc. v. City of Miami Gen. Employees’, 107 A.3d 1049, 1054, 1072 (Del. 2014) (“To blue-pencil an agreement to excise a provision beneficial to a third party like Nabors on the basis of a provisional record and then declare that the third party could not regard the excision as a basis for relieving it of its own contractual duties involves an exercise of judicial power inconsistent with the standards that govern the award of mandatory injunctions under Delaware law.”). </li></ul>TakeawaysAlthough it is unclear whether other courts applying Delaware law to sale of business non-competes will follow the Kodiak decision, the case raises certain considerations for companies to keep in mind when drafting or trying to enforce non-competes in the sale of business context in Delaware.<ul><li>Even in the sale of business context, careful consideration should be given to drafting and determining the scope of the non-compete and the legitimate business interests the non-compete is intended to protect.</li></ul><ul><li>If the non-compete will cover a buyer’s existing businesses, consider whether the existing businesses are in the same industry as what the buyer is acquiring.</li></ul><ul><li>If buyer wants to subject individual sellers to non-competes that cover the company’s existing businesses, the non-compete could be even more defensible if the buyer employs the individual seller post-closing rather than have the individual seller remain employed by the acquired entity (as seemed to be the case in Kodiak). In that case, the buyer should also consider having the seller enter into separate employment non-competes in addition to having a non-compete related to the sale of business.</li></ul><ul><li>Care should be paid before blue penciling is relied upon as a guaranteed fail-safe.  Blue pencil often means something different depending on the jurisdiction.  Just because a court is in a jurisdiction where it can blue pencil, does not necessarily mean it will or that it must.</li></ul><a href="#_ftnref1" target="_self" id="_ftn1">[1]</a> Plaintiff’s Reply Brief in Support of Its Motion for a Preliminary Injunction, KODIAK BUILDING PARTNERS, LLC, Plaintiff, v. Philip D. ADAMS, Defendant, 2022 WL 4758315 (Del.Ch.) (“But Adams has failed to cite a single case—from Delaware or otherwise—where the Court found a non-compete entered into in connection with the sale of a business to be unenforceable.  To the contrary, Delaware courts have enforced restrictive covenants much broader than the one at issue here because such restrictions are ‘common-place’ and designed to ‘clear the seller from the competitive space while the buyer strives to make the business he just bought successful.’”).

Delaware Court Refuses to Enforce or Blue Pencil Sale of Business Non-compete

While courts generally appear to give greater deference to enforcement of sale of business non-competes, at least one Delaware court confirmed that if a court thinks the restrictions go beyond the scope of the business being sold, it may refuse to enforce the non-compete and strike it in its entirety without blue-penciling. A consideration for parties when drafting sale of business non-competes.