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.

Social

Search

Editors

turnbull_andrew_blog_150x150.png

turnbull_andrew_common_640x280.jpg

turnbull_andrew_heroretina_2700x1160.jpg

turnbull_andrew_mobileretina_750x1040.jpg

turnbull_andrew_social_600x600.jpg

Co-Chair, Global Employment and Labor Practice

Partner

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.

Andrew Turnbull

favicon.ico

favicon-16x16.png

favicon-32x32.png

apple-touch-icon.png

MoFo Favicons

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>.

Welcome to the MoFo ELC Blog

elcblog-header-image.jpg

Welcome to the MoFo ELC Blog

elcblog-header-image

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 legislati

Announcements

Blog - Terms of Use

Blog - Cookies

Blog - Privacy Policy

Blog - Blog Disclaimer

Blog - Attorney Advertising

morrison-foerster-blog-logo.png

Provides insights and reports on the most current class actions lawsuits and product liability issues that affect consumer-facing companies.

Class Dismissed Blog

Class Dismissed

In-depth analysis of developments and trends impacting government contracting.

Government Contract Insights Blog

Government Contract Insights

Looks behind the headlines to explore the trends, identify the opportunities, analyze the issues, and provide guidance for science and technology-based companies.

MoFo Tech Blog

News and thought leadership from lawyers whoa re adding value to the legal profession and the communities we call home.

 MoFo+ Blog

MoFo+

Read our Employment Law Commentary blog for the latest insights in employment and labor law, covering issues from ADA compliance to trade secrets protection.

Employment Law Commentary

MoFo ELC | Latest Employment Law Developments and Commentary

  Linkedin

MoFo LinkedIN

ELC Blog - RSS

Stay Connected

By submitting your data to subscribe to this blog, you approved Morrison & Foerster LLP to email you future information about MoFo news and events. You may opt-out at any time by sending a request to <a href="mailto:mofonews@mofo.com" target="_self">mofonews@mofo.com</a>. To learn more about how Morrison & Foerster LLP uses and protects your personal data, please view our <a href="https://www.mofo.com/about/privacy-policy.html" target="_self">Privacy Policy</a> at <a href="https://www.mofo.com/">www.mofo.com</a>.

Never miss a post from MoFo ELC. Enter your email below to stay up-to-date.

Subscribe

Practical Answers to Employment Law Issues

Morrison Foerster - Footer

Blogs -  Home Button

Home

Blog - Topics

Americans with Disabilities Act (ADA)

Artificial Intelligence

Coronavirus (COVID-19)

Department of Labor (DOL)

Discrimination

EEOC

European Union

Family Medical Leave Act (FMLA)

Immigration

Intellectual Property

Leaves of Absence

Legislation

NLRB

Non-Compete

OFCCP

PAGA

Paid Sick Leave

Pay Equity

Privacy & Data Security

Reductions in force (RIFs)

Trade Secrets

Wage and Hour

Workplace Misconduct

Topics

Blog - Editors

Blog - About

About

Blog - Subscribe

Andrew R. Turnbull

More

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

Good News for Employers: Texas Court Blocks FTC’s Non-Compete Ban

LinkedIN

On August 20, 2024, a judge in the U.S. District Court for the Northern District of Texas granted a nationwide injunction against the Federal Trade Commission’s (“FTC’s”) rule banning non-competes with employees (the “<a href="/topics/ftc-issues-final-rule-banning-non-competes" target="_self">Rule</a>”).  As we <a href="https://www.mofo.com/resources/insights/240815-the-impending-ftc-non-competition-final-rule" target="_blank">previously</a> reported, the court foreshadowed this ruling last month when it issued a limited injunction, barring the Rule from applying only to the plaintiffs in that case.  For now, employers can breathe a sigh of relief that the court has extended the injunction to all employers.Read the full <a href="https://www.mofo.com/resources/insights/240822-good-news-for-employers-texas-court-blocks" target="_blank">client alert</a>.

tate_eric_blog_150x150.png

tate_eric_common_640x280.jpg

tate_eric_heroretina_2700x1160.jpg

tate_eric_mobileretina_750x1040.jpg

tate_eric_social_600x600.jpg

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

okuliar_alexander_blog_150x150.png

okuliar_alexander_common_640x280.jpg

okuliar_alexander_heroretina_2700x1160.jpg

okuliar_alexander_mobileretina_750x1040.jpg

okuliar_alexander_social_600x600.jpg

Co-chair Global Antitrust Law Practice Group

Alex Okuliar is Co-Chair of Morrison Foerster’s Global Antitrust Law Practice Group. He is the former Deputy Assistant Attorney General for Civil Antitrust Enforcement at the U.S. Department of Justice and a former advisor at the Federal Trade Commission.

Alexander Okuliar

phelan_lisa_blog_150x150.png

phelan_lisa_common_640x280.jpg

phelan_lisa_heroretina_2700x1160.jpg

phelan_lisa_mobileretina_750x1040.jpg

phelan_lisa_social_600x600.jpg


Lisa M. Phelan, former Chief of the National Criminal Enforcement and Washington Criminal I Sections of the Antitrust Division of the U.S. Department of Justice (DOJ), is a partner and Co-Chair of Mo

Lisa Phelan

Lisa M. Phelan

gebert_eric_blog_150x150.png

gebert_eric_common_640x280.jpg

gebert_eric_heroretina_2700x1160.jpg

gebert_eric_mobileretina_750x1040.jpg

gebert_eric_social_600x600.jpg

Associate

Eric has experience defending class action, labor and employment, and intellectual property matters, including developing procedural strategies for clients preparing for trial, as well as examining in

Eric Gebert

he_helen_blog_150x150.png

he_helen_common_640x280.jpg

he_helen_heroretina_2700x1160.jpg

he_helen_mobileretina_750x1040.jpg

he_helen_social_600x600.jpg

Helen He is an associate in the Litigation Department of Morrison Foerster’s San Francisco office.

Helen He

elcblog-employment-trends.jpg

elcblog-employment-trends

On April 24, 2024, the U.S. Federal Trade Commission (FTC) promulgated its final rule prohibiting non-competes for most workers in the United States (the “Final Rule”).The Final Rule raises several issues, including enforceability, legal challenges, policy implications, how it interacts with other laws, and what may be some of its potential exceptions. This article focuses on the potential exceptions.Read the <a href="https://www.mofo.com/resources/insights/240501-potential-exceptions-under-ftc-s-non-compete-ban" target="_blank">full client alert</a>.

spinelli_cooper_blog_150x150.png

spinelli_cooper_common_640x280.jpg

spinelli_cooper_heroretina_2700x1160.jpg

spinelli_cooper_mobileretina_750x1040.jpg

spinelli_cooper_social_600x600.jpg

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

gerking_megan_blog_150x150.png

gerking_megan_common_640x280.jpg

gerking_megan_heroretina_2700x1160.jpg

gerking_megan_mobileretina_750x1040.jpg

gerking_megan_social_600x600.jpg

Megan E. Gerking is a partner in Morrison & Foerster’s Global Antitrust Law Practice, where she specializes in government-facing antitrust matters. Megan represents companies in criminal and civil con

Megan Gerking

Megan E. Gerking

On April 24, 2024, the U.S. Federal Trade Commission (FTC) promulgated its final rule prohibiting non-competes for most workers in the United States (the “Final Rule”).

Potential Exceptions Under FTC’s Non-Compete Ban

On April 23, 2024, the Federal Trade Commission (the “Commission”) voted to issue its final rule (the “Final Rule”) barring non-competes for most workers in the United States, with exceptions for non-competes entered into in the context of a sale of business. The Final Rule will go into effect 120 days after its publication in the Federal Register. While we continue to digest the over 570 pages of the Final Rule, here are some initial observations.Read the <a href="https://www.mofo.com/resources/insights/240423-ftc-issues-final-rule-banning-non-competes" target="_blank">full client alert</a>.

FTC Issues Final Rule Banning Non-Competes

schulman_michael_blog_150x150.png

schulman_michael_common_640x280.jpg

schulman_michael_heroretina_2700x1160.jpg

schulman_michael_mobileretina_750x1040.jpg

schulman_michael_social_600x600.jpg

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

wilks_melissa_blog_150x150.png

wilks_melissa_common_640x280.jpg

wilks_melissa_heroretina_2700x1160.jpg

wilks_melissa_mobileretina_750x1040.jpg

wilks_melissa_social_600x600.jpg

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

Melissa M. Harclerode

Melissa Harclerode

FTC Issues Final Rule Banning Non-Competes

On April 23, 2024, the Federal Trade Commission (the “Commission”) voted to issue its final rule (the “Final Rule”) barring non-competes for most workers in the United States, with exceptions for non-competes entered into in the context of a sale of business.

While the FTC was relatively quiet in 2023 on the non-compete front, California forged ahead with two amendments to its non-compete statute (Business and Professions Code section 16600) that, depending on how courts interpret them, could be one of the most significant developments in the California employee-mobility space in the last 10 years. One of the amendments (SB 699) extends California’s non-compete ban to those signed by out-of-state employees under out-of-state law and creates a private right of action. The other (AB 1076) makes it “unlawful” to enter into a non-compete with an employee and required employers to notify their current and former employees by February 14, 2024, that any such non-competes are void. Each raises at least as many questions as they answer, including the effect, if any, on the Private Attorneys General Act (PAGA), employee non-solicits, and extraterritoriality. New York state, meanwhile, made news for what it did not enact—a total ban on non-competes. But although New York’s governor vetoed the total-ban bill, the New York City Council introduced a non-compete bill of its own in February 2024 that would ban all non-competes in the city without exception. Below we survey the latest on the FTC’s proposed rule, California’s new non-compete amendments, the New York state ban that was vetoed, and the proposed ban that was recently introduced in the New York City Council.FTC UPDATERecent reporting indicates that while the FTC may vote on the final version of its rule as early as April 2024, for various reasons such a vote may not happen until later in the year.Commissioner Lina Khan touched on the proposed rule on a panel at the American College of Emergency Physicians last October 2023, stating that the FTC had received far more feedback from individuals who work in healthcare than any other individual sector and an “overwhelming” number of comments supported total ban: “We’re looking at all those comments very closely and figuring out where to land,” she said. “But I’ll be honest, the overwhelming number of comments are firmly in support of the FTC proposal to ban non-competes across the board. And so, we take that very seriously.”[1]The FTC and DOL also entered into a Memorandum of Understanding (MOU) in September 2023 in furtherance of the President’s Executive Order on Competition. According to the press release, “[t]he new agreement enables the FTC and DOL to closely collaborate by sharing information, conducting cross-training for staff at each agency, and partnering on investigative efforts within each agency’s authority.”[2] Among the areas of mutual interest for the two agencies, the MOU identifies “the imposition of one-sided and restrictive contract provisions, such as non-compete and training repayment agreement provisions.” Id.And of course, it is unclear how the election year will affect these plans.CALIFORNIAKey Legislative DevelopmentsSB 699 and AB 1076 both took effect on January 1, 2024.SB 699SB 699 added section 16600.5 to the California Business and Professions Code, rendering unenforceable any contract that is void under the California framework. In relevant part, the law takes California’s expansive non-compete framework and further extends it to contracts that are signed and executed under laws outside California: “An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California.” Cal. Bus. & Prof. Code § 16600.5(b). The amendment also creates a civil cause of action for any employee against an employer that enters into or attempts to enforce a contract that is void under this law, entitling such employee to injunctive relief, actual damages, or both, as well as reasonable attorneys’ fees and costs.AB 1076Making direct reference to Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, AB 1076 amended section 16600 of the Business and Professions Code to void the application of any non-compete agreement in any employment context regardless of how narrowly tailored it may be, unless it meets an existing exception under California state law. It also added section 16600.1 to the California Business and Professions Code, providing that:<ul><li>It is “unlawful” to include a “noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement, that does not satisfy an exception in this chapter.”</li><li>Employers who have non-compete clauses in contracts with current employees or former employees employed after January 1, 2022, were required to notify those employees by February 14, 2024, that the non-compete clause is void.</li><li>A violation of this section is an act of unfair competition under California law (section 17200), allowing for the relief and penalty provided therein.</li></ul>Section 16600.1 otherwise is silent on relief. Unlike SB 699, AB 1076 does not expressly authorize attorneys’ fees or actual damages.Rejected BillThe California legislature was considering but ultimately did not advance <a href="https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240AB747" target="_blank">A.B. 747</a>, which would have imposed, in addition to actual damages, a $5,000 penalty per employee for entering into or attempting to enforce a non-compete.Open Questions and ConsiderationsExtraterritorialityCalifornia has a general presumption against extraterritorial application of its laws that has been recognized by its Supreme Court. Sullivan v. Oracle Corp., 51 Cal. 4th 1191, 1207 (2011). SB 699 did not purport to overturn, and did not even reference, Sullivan.SB 699 provides that “An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California.” Cal. Bus. & Prof. Code § 16600.5(b).But language found in the preamble to SB 699 (enacting section 16600.5) suggests that the amendment was intended to protect employees who are performing work in California and thus should not be applied to employees outside California:<ul><li>“(e) The California courts have been clear that California’s public policy against restraint of trade law trumps other state laws when an employee seeks employment in California, even if the employee had signed the contractual restraint while living outside of California and working for a non-California employer.”</li><li>“(f) California has a strong interest in protecting the freedom of movement of persons whom California-based employers wish to employ to provide services in California, regardless of the person’s state of residence. This freedom of employment is paramount to competitive business interests.”[3]</li></ul>Thus, one question that arises is to what extent does California’s ban apply to employees who remain and work outside California and remain there?PAGAPAGA applies only to violations of the Labor Code. The statutes that prohibit non-competes, including the newly enacted statutes in sections 16600.1 and 16600.5, are in the Business and Professions Code, not the Labor Code.But cases have been filed by California employees under PAGA challenging non-competition agreements purporting to rely on a catchall in the Labor Code—Labor Code section 432.5—which prohibits any employer or manager from requiring an employee or applicant for employment to agree in writing to a term or condition that know by such employer or manager to be “prohibited by law.” Cal. Labor Code § 432.5.[4]Whether a violation of Business and Professions Code section 16600 can be pursued under PAGA and warrant penalties under Labor Code section 432.5 are additional questions that may need to be resolved.Relief under Business and Professions Code section 17200Business and Professions Code section 16600.2 (AB 1076) on its face limits relief to what is available under section 17200, i.e., restitution, including restoring money to any person from whom the money has been obtained through unfair competition, for any unjust enrichment of an employer, injunctive relief, and possibly attorneys’ fees (by way of California Code of Civil Procedure section 1021.5).  Courts have generally held that damages are not available under section 17200. Section 17206 does provide for a civil penalty of $2,500 per violation, but only in an action brought by a public prosecutor, such as the state attorney general, any district attorney, or certain city attorneys. Assuming a public prosecutor brought a case and was awarded civil penalties, the statute is silent on how the penalty would be assessed other than the penalty is for “each violation.”Employee Non-Solicits and Fixed-Term AgreementsEach amendment is silent on employee non-solicits and fixed-term employment agreements.The new statutory subdivision, as amended by AB 1076, also requires section 16600 to be “read broadly” and states that this “does not constitute a change in, but is declaratory of, existing law.” Whether courts interpret the amendments to apply to these agreements remains to be seen.Labor Code Section 925(e)Before enactment of SB 699, some courts had, as we <a href="/topics/recent-non-compete-trends-courts-continue-to-enforce-non-competes-while-politicians-seek-to-narrow-them" target="_self">reported</a> in 2023,[5] construed California Labor Code section 925(e) as an exception of sorts to section 16600 if the employee is represented by the individual counsel of their choice. While AB 1076 expressly referred to Edwards, neither amendment mentioned Labor Code section 925 or 925(e) at all.What, if any, effect section 16600.5’s prohibition—that “an employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California”—will have on this issue remains an open question.NEW YORKOn December 22, 2023, New York Governor Kathy Hochul vetoed a bill that would have had a wide-ranging impact on employment contracts in the state.The New York state legislature passed State Senate Bill 2023-S3100A in June 2023, broadly limiting post-employment non-compete clauses. The bill defined “covered individuals” as “any other person who, whether or not employed under a contract of employment, performs work or services for another person on such terms and conditions that they are, in relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person,” expanding to all employees or contractors regardless of position or income.The bill would have prohibited the use of non-compete agreements for all employers of any type. A non-compete was defined in S3100A as “any agreement, or clause contained in any agreement, between an employer and a covered individual that prohibits or restricts such covered individual from obtaining employment, after the conclusion of employment with the employer included as a party to the agreement.” The bill went on to render void “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” S3100A had no express exceptions to the prohibition of post-employment non-compete agreements, but the ban would not have prohibited an employer from entering into a fixed-term employment agreement, prohibiting a “covered individual” from disclosing trade secrets and confidential or proprietary client information, or prohibiting solicitation of the employer’s clients that the former employee learned about during their employment.S3100A would have allowed “covered individuals” to bring a civil action to seek lost compensation, other damages, and reasonable attorneys’ fees and costs. Additionally, courts would have been directed to award liquidated damages of up to $10,000 per covered individual. In her veto memo, Governor Hochul expressed support for a restriction on non-compete agreements for middle-class and low-wage workers, likely signaling that she would sign a revised bill with a narrower scope into law.NEW YORK CITYThe New York City Council introduced a trio of bills on or around February 28, 2024, ranging from a total ban to a ban only for low-wage or freelance workers. The total-ban bill (Int. No. 140) includes a non-compete definition comparable to the New York state bill.[6] The same bill would prohibit New York City employers from entering into or maintaining a non-compete with a worker or representing to the worker that the worker is subject to a non-compete clause where the employer has no good-faith belief in its enforceability. It also would require covered employers to rescind any existing non-compete agreements. Unlike the New York state bill, New York City’s total-ban bill does not contain any exceptions (e.g., fixed-term employment agreements) on its face. Violators would be subject to a civil penalty of $500 per violation, enforced by the Office of Labor Policy & Standards. In its current form, it would not create a private right of action.[1] <a href="https://www.fiercehealthcare.com/regulatory/ftc-full-steam-ahead-sweeping-noncompete-ban-reinforcing-antitrust-chair-tells-docs" target="_blank">https://www.fiercehealthcare.com/regulatory/ftc-full-steam-ahead-sweeping-noncompete-ban-reinforcing-antitrust-chair-tells-docs</a>.[2] <a href="https://www.ftc.gov/news-events/news/press-releases/2023/09/ftc-department-labor-partner-protect-workers-anticompetitive-unfair-deceptive-practices?utm_source=govdelivery" target="_blank">https://www.ftc.gov/news-events/news/press-releases/2023/09/ftc-department-labor-partner-protect-workers-anticompetitive-unfair-deceptive-practices?</a>[3] Emphasis added. <a href="https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB699" target="_blank">https://leginfo.legislature.ca.gov/faces/bill</a>.[4] “No employer, or agent, manager, superintendent, or officer thereof, shall require any employee or applicant for employment to agree, in writing, to any term or condition which is known by such employer, or agent, manager, superintendent, or officer thereof to be prohibited by law.” Cal. Labor Code § 432.5.[5] <a href="https://elc.mofo.com/topics/recent-non-compete-trends-courts-continue-to-enforce-non-competes-while-politicians-seek-to-narrow-them?" target="_blank">https://elc.mofo.com/topics/recent-non-compete-trends-courts-continue-to-enforce-non-competes-while-politicians-seek-to-narrow-them?</a>[6] <a href="https://legistar.council.nyc.gov/LegislationDetail.aspx?ID=6557380&GUID=86B0DBB1-329A-46B9-9763-44062F71366C&Options=&Search=" target="_blank">The New York City Council - File #: Int 0140-2024 (nyc.gov)</a> (“The term “non-compete agreement” means an agreement between an employer and a worker that prevents, or effectively prevents, the worker from seeking or accepting work for a different employer, or from operating a business, after the worker no longer works for the employer.”).

While the FTC was relatively quiet in 2023 on the non-compete front, California forged ahead with two amendments to its non-compete statute (Business and Professions Code section 16600) that, depending on how courts interpret them, could be one of the most significant developments in the California employee-mobility space in the last 10 years.

Non-Compete Q1 2024 Round Up - FTC, California, and New York

New York State is expected to join the <a href="https://elc.mofo.com/topics/minnesota-passes-near-total-ban-of-non-compete-agreements" target="_blank">growing number of states</a> that significantly limit or prohibit non-compete agreements. On June 20, 2023, the New York State legislature passed S3100A, a bill broadly prohibiting post-employment non-compete restrictions. S3100A is expected to be signed by Governor Kathy Hochul and would take effect 30 days after her signature. Read the <a href="https://www.mofo.com/resources/insights/230622-new-york-state-non-compete-ban-bandwagon" target="_blank">full client alert</a>.

New York State is expected to join the growing number of states that significantly limit or prohibit non-compete agreements.

New York State Slated to Join Post-Employment Non-Compete Ban Bandwagon

On May 30, 2023, the National Labor Relations Board’s (the “NLRB’s”) General Counsel Jennifer Abruzzo (the “General Counsel”) issued <a href="https://www.nlrb.gov/news-outreach/news-story/nlrb-general-counsel-issues-memo-on-non-competes-violating-the-national" target="_blank">Memo General Counsel 23-08</a> (the “Memo”), expansively finding that non‑competes with employees violate the National Labor Relations Act (the “Act”), except in limited circumstances. As <a href="https://elc.mofo.com/topics/nlrb-gc-takes-broad-view-of-the-mclaren-macomb-decision" target="_blank">foreshadowed in her memo</a> on the NLRB’s enforcement against overbroad non‑disparagement and confidentiality clauses related to the McLaren Macomb decision, the General Counsel claims, without clear legal authority or other support, that offering, maintaining, or enforcing non‑competes and non-solicits with employees violates Section 7 of the Act where they reasonably tend to chill employees from engaging in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The Memo lists a variety of rationales, including non-competes with low-wage workers, to justify the General Counsel’s finding. The Memo, however, fails to articulate any clear examples of how non-competes interfere with traditional “concerted activities” protected by the Act, particularly in any manner to justify the sweeping scope of non-competes the Memo appears to find are unlawful. The Memo simply declares that non-competes are unlawful under the Act unless the employer can show that the non‑compete is “narrowly tailored to special circumstances justifying the infringement of employee rights.” Read the <a href="https://www.mofo.com/resources/insights/230605-nlrb-general-counsel-memo-seeks-aggressive-enforcement?utm_source=publication&utm_medium=email" target="_blank">full client alert</a>.

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.

220721-elc-blog-thumbnail.jpg

220721-elc-blog-thumbnail

On May 30, 2023, the National Labor Relations Board’s (the “NLRB’s”) General Counsel Jennifer Abruzzo (the “General Counsel”) issued Memo General Counsel 23-08 (the “Memo”), expansively finding that non‑competes with employees violate the National Labor Relations Act (the “Act”), except in limited circumstances.

NLRB General Counsel Memo Seeks Aggressive Enforcement Against Employee Non-Competes

On May 16, 2023, the Minnesota legislature passed <a href="https://www.revisor.mn.gov/bills/text.php?number=SF3035&version=latest&session=ls93&session_year=2023&session_number=0" target="_blank">SF 3035</a> (the “Bill”), banning nearly all post-termination non-compete agreements with employees and independent contractors. Although the Bill marks another state in the trend of jurisdictions passing laws limiting the use of employee non-competes, the Bill goes even further than most of the recent laws to join the ranks of California, Oklahoma, and North Dakota to ban practically all employee non-compete agreements. Some of the more notable provisions include:<ul><li>Banning non-compete agreements with all levels of employees and independent contractors, regardless of compensation or role, with only limited exceptions for non-competes entered into in connection with the sale of business or dissolution of a business;</li></ul><ul><li>Requiring employers to use Minnesota law and forum;</li></ul><ul><li>Allowing courts to award attorneys’ fees to plaintiffs who prove violations of the Bill; and</li></ul><ul><li>Excluding nondisclosure and non-solicitation agreements from the Bill’s requirements.</li></ul>Minnesota Governor Tim Waltz is expected to sign the Bill. Once signed, the Bill will apply to all non-compete agreements entered into on or after July 1, 2023, but it would not apply retroactively to non-competes entered into before then. Employers with employees and independent contractors in Minnesota should start preparing for compliance with the Bill, including reviewing their template employment agreements with non-competes and considering updating their existing policies and practices for preventing unfair competition. Not RetroactiveThe Bill expressly states that the limitations on non-competes are not retroactive. So, the Bill will not apply to non-compete agreements entered into prior to July 1, 2023, and those agreements will continue to be interpreted consistent with existing Minnesota precedent.Covered Employers and IndividualsThe Bill will cover nearly all non-competes between employers and their employees and independent contractors. The Bill broadly defines “employer” to include “any individual, partnership, association, corporation, business, [or] trust” and includes any person “acting directly or indirectly in the interest[s] of an employer in relation to an employee.”“Employee” is also defined broadly to include “any individual who performs services for an employer, including independent contractors.” The Bill defines independent contractors as anyone whose engagement “is governed by a contract” and is not reported to the IRS on a W-2, including any corporate entity if the employer requires an individual to form such entity “for purposes of entering into a contract for services as a condition of receiving compensation under an independent contractor agreement.”Unlike some of the other recent state non-compete laws that limit non-competes to employees under a certain compensation threshold, such as non-compete laws in <a href="https://elc.mofo.com/topics/tightening-restrictions-on-noncompetes" target="_blank">Washington</a> and the <a href="https://elc.mofo.com/topics/dc-council-waters-down-non-compete-ban-while-keeping-some-significant-limitations" target="_blank">District of Columbia</a>, the Bill does not distinguish between types of employees in its ban on non-competes. Rather, the Bill joins jurisdictions like California, banning non-competes with employees at all levels regardless of compensation, including highly paid C‑Suite executives. It also expressly covers non-competes with independent contractors, which have been absent from some of the non-compete legislation other jurisdictions have recently issued.Covered AgreementsThe Bill prohibits nearly all post-termination non-competes with employees and independent contractors. The Bill defines a “covenant not to compete” as an “agreement between an employee and employer that restricts the employee, after termination of the employment, from performing: (1) work for another employer for a specified period of time; (2) work in a specified geographical area; or (3) work for another employer in a capacity that is similar to the employee’s work for the employer that is party to the agreement.” Non-Covered AgreementsThe Bill contains the following two limited exceptions where non-competes are permitted:<ul><li>Non-competes entered into in connection with the sale of a business, where the agreement prohibits the seller from carrying on a similar business within a reasonable geographic area and for a reasonable length of time; and</li></ul><ul><li>Non-competes in anticipation of the dissolution of a business, where the applicable parties agree that all or any number of the parties will not carry on a similar business within a reasonable geographic area where the business has been transacted.</li></ul>The Bill also explicitly does not apply to the following types of restrictive covenants:<ul><li>Nondisclosure agreements or agreements designed to protect trade secrets or confidential information; and</li></ul><ul><li>Non-solicitation agreements or agreements restricting the ability to use client or contact lists or solicit customers of the employer.</li></ul>The Bill also only applies to non-compete restrictions that cover periods “after termination of employment.”  So, employers can still have non-competes with employees or independent contractors during their employment or engagement.Mandatory Minnesota Law and Venue RequiredThe Bill prohibits employers from trying to avoid these requirements by using another state’s law or forum.  Specifically, the Bill requires employers to use Minnesota law and forum for any agreements entered into as “a condition of employment” with employees who primarily reside and work in Minnesota. It will be an open question whether employers can use other states’ laws or forums that are not entered into as a condition of employment (e.g., for equity awards or bonus agreements). If employers try to use another choice of law or forum in covered agreements, the choice of law and forum will be voidable and the matter would be adjudicated in a Minnesota court under Minnesota law.Remedies for ViolationsThe inclusion of an unenforceable non-compete would not automatically render the entire agreement with the offending provision unenforceable. Rather, the Bill states that it would not be “construed to render void or unenforceable any other provisions in a contract or agreement containing a void or unenforceable covenant.” The Bill also allows courts discretion to award an employee reasonable attorneys’ fees for trying to enforce his or her rights under the Bill. So, it will be important for employers to ensure they comply with the Bill since they could find themselves having to pay attorneys’ fees for agreements found to violate the Bill.Practical Steps for EmployersBusinesses with operations, employees, or independent contractors in Minnesota should review their non-compete practices and policies in light of the Bill. As an initial step, employers should review and, if needed, revise template employment agreements with non-competes to comply with the Bill, including by removing post-employment non-competes and updating choice of law and forum selection provisions for covered employees and independent contractors.Because the Bill will ban post-employment non-competes with all levels of employees and independent contractors (regardless of role and compensation), employers should determine what agreements or policies they can adopt to protect themselves from unfair competition either before the Bill takes effect or without the use of non-competes. Some possible actions to consider include:<ul><li>Trying to get non-compete agreements in place with covered employees and independent contractors before the Bill takes effect.</li></ul><ul><li>Updating confidential information policies and agreements, including reevaluating how employees are provided with access to the employer’s highly sensitive and confidential information. Because employers will lose their ability to have one of the most effective tools for preventing against unfair competition, employers should consider whether limiting the distribution of sensitive information to reduce possible exposure is advisable. Employers might also consider implementing systems that limit, control, and track access to company confidential information and trade secrets to mitigate the risk of misuse when covered employees and independent contractors go to work for competitors.   </li></ul><ul><li>Consider whether to revise customer and employee non-solicitation agreements and confidentiality provisions to ensure they provide meaningful protection of the employer’s trade secrets, intellectual property, goodwill, and customer and employee relationships.</li></ul>The Bill also marks the latest state in a trend of jurisdictions across the United States cracking down on non-compete provisions. As we <a href="https://elc.mofo.com/topics/recent-non-compete-trends-courts-continue-to-enforce-non-competes-while-politicians-seek-to-narrow-them" target="_blank">previously reported</a>, we have seen a trend of legislatures and regulators seeking to ban or narrow the scope of non-compete agreements, and some courts are even signaling closer scrutiny of non-competes under existing precedent. The following are some of the more notable trends and developments:<ul><li>Several states, including <a href="https://www.mofo.com/resources/insights/220517-colorados-new-limits-on-employee-non-competes" target="_blank">Colorado</a> and <a href="https://elc.mofo.com/topics/illinois-new-restrictions-non-competes-and-non-solicits" target="_blank">Illinois</a>, have issued more comprehensive non-compete legislation, significantly limiting the use of non-competes with employees, and even more states have banned non-competes for low wage workers.</li></ul><ul><li>The Federal Trade Commission (FTC) <a href="https://www.mofo.com/resources/insights/230106-ftc-proposes-sweeping-ban-employee-non-competes" target="_blank">recently proposed a rule</a> seeking to ban non-compete agreements with employees, even non-competes entered into before the rule becomes final, except in very limited circumstances. Whether the FTC will narrow the rule before it becomes final remains to be seen, but the FTC’s rule will almost certainly be subject to legal challenges once it becomes final. Regardless of the outcome of the FTC’s proposed rule, the FTC has pursued <a href="https://www.mofo.com/resources/insights/230117-ftc-takes-unprecedented-enforcement-actions" target="_blank">enforcement actions</a> and entered into consent decrees with several companies requiring them to rescind non-compete agreements with their employees.</li></ul><ul><li>Some state courts have also appeared to subject non-compete agreements to closer scrutiny, including <a href="https://elc.mofo.com/topics/trio-of-delaware-cases-signal-stricter-review-of-sale-of-business-non-competes" target="_blank">Delaware Chancery Courts</a> that have recently refused to enforce or blue pencil sale-of-business non-competes.</li></ul>In light of these and other developments, businesses should continue to monitor changes in this area that may impact their non-compete strategies and practices with employees and independent contractors.

210120-federal-building-election-briefing-tile-promo.jpg

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

210120-federal-building-election-briefing-tile-promo

On May 16, 2023, the Minnesota legislature passed SF 3035 (the “Bill”), banning nearly all post-termination non-compete agreements with employees and independent contractors. Although the Bill marks another state in the trend of jurisdictions passing laws limiting the use of employee non-competes, the Bill goes even further than most of the recent laws to join the ranks of California, Oklahoma, and North Dakota to ban practically all employee non-compete agreements.

Minnesota Passes Near Total Ban of Non-Compete Agreements

The U.S. Department of Justice’s (“DOJ’s”) ongoing efforts against no-poach agreements suffered their latest setback on April 28, 2023, following the Connecticut federal court’s ruling in U.S.A. v. Mahesh Patel, acquitting all six defendants of criminal liability for allegedly entering into a horizontal no-hire agreement. Though it is tied to the particular facts of the case, the ruling is yet another sign that the DOJ continues to face an uphill battle to impose criminal liability on what typically has been a civil issue.Overview of DOJ No-Poach EnforcementThe DOJ has the power to enforce restraints of trade that violate the Sherman Act. Criminal liability under the Sherman Act can be considerable—companies face criminal fines of $100 million or more, and executives face up to 10 years in prison.Criminally, the DOJ typically has gone after only per se restraints of trade. The per se rule historically has been applied to restraints such as price-fixing, bid-rigging, and market allocations “that would always or almost always tend to restrict competition and decrease output.”<a href="#_ftn1" target="_self" id="_ftnref1">[1]</a> These restraints are considered per se unreasonable and therefore “do not require elaborate inquiry as to the precise harm they have caused or the business excuse for their use.”<a href="#_ftn2" target="_self" id="_ftnref2">[2]</a> No-poach agreements, however, had not traditionally been a DOJ target for criminal enforcement.<a href="#_ftn3" target="_self" id="_ftnref3">[3]</a>That began to change around 2010, when the DOJ started filing multiple civil enforcement actions against Silicon Valley tech companies, arguing no-poach agreements between them were per se unlawful (the “High Tech cases”). After a couple of years, the parties settled and entered stipulated final judgments that prohibited agreements to refrain from soliciting, recruiting, or otherwise competing for employees. But these judgments did not prohibit an agreement with a “no direct solicitation provision” if it was not a “naked” agreement, i.e., if the agreement was ancillary to a specific legitimate transaction such as existing or future employment or severance agreements, M&A deals, contracts with consultants, settlement agreements, and contracts with resellers.<a href="#_ftn4" target="_self" id="_ftnref4">[4]</a>The DOJ brought its first criminal actions against no-poach agreements in 2021. Other than one plea deal and one case that remains pending, defendants have obtained acquittals against the DOJ in each case to date. Patel was the latest.<table><colgroup data-width='624'><col style="width:35.256410256410255%"><col style="width:30.448717948717945%"><col style="width:34.294871794871796%"></colgroup><tbody><tr><td>Case</td><td>Charges</td><td>Outcome</td></tr><tr><td>U.S. v. DaVita, No. 1:21-cr-00229 (D. Colo. Jul. 14, 2021)</td><td>Three competitors—each run by DaVita alumni—agreed to (1) avoid recruiting DaVita’s executives and (2) tell DaVita employees applying to work for any of the three competitors that they had to alert DaVita they were considering leaving before they could receive an offer</td><td>Acquittal: Not guilty jury verdict</td></tr><tr><td>United States v. Manahe, No.  2:22-cr-00013-JAW (D. Me. Mar. 22, 2023)</td><td>Two-month conspiracy between April and May 2020 not to hire each other’s caretakers and to fix caretaker wages</td><td>Acquittal: Not guilty jury verdict</td></tr><tr><td>U.S.A. v. Mahesh Patel, No. 3:21-CR-220 (VAB), (D. Conn. Apr. 28, 2023)</td><td>Conspiracy in which they agreed not to poach competitors’ workers for more than a decade</td><td>Acquittal: Court granted judgment of acquittal before case went to jury</td></tr><tr><td>U.S. v. Hee, No. 2:21-cr-00098 (D. Nev. Oct. 27, 2022)</td><td>No-hire agreement and agreement not to raise wages for school nurses in Clark County, Nevada</td><td>Plea agreement: Staffing company defendant, VDA OC LLC, agreed to pay $134,000 in criminal fines and restitution as a result of the plea. Individual defendant Mr. Hee agreed to 180 hours of community service and pretrial diversion</td></tr><tr><td>United States v. Surgical Care Affiliates LLC, No. 3:21-cr-00011 (N.D. Tex. Nov. 11, 2022)</td><td>Agreements with DaVita and another company not to solicit each other’s executives</td><td>Pending: Trial originally scheduled for January 2023 has been continued. Defendant’s motion to dismiss is pendingDefendant just filed a Notice of Additional Authority on May 9, 2023, arguing that the Patel decision strongly supports its motion to dismiss</td></tr><tr><td>United States v. Jindal, No. 20-cv-0358 (E.D. Tex. Apr. 14, 2022)</td><td>Conspiracy to fix wages of physical therapist assistants in Dallas area</td><td>Acquittal: Not guilty jury verdict</td></tr></tbody></table>U.S.A. v. Mahesh PatelBackground. Patel was one of the DOJ’s higher-profile cases. In December 2021, the DOJ indicted six executives and managers from Raytheon and other aerospace firms, charging them with a conspiracy in which they agreed not to poach competitors’ workers for more than a decade. The court denied defendants’ motion to dismiss, and the case went to trial. Once the government rested its case-in-chief, defendants moved for a judgment of acquittal, arguing that the government’s evidence “does not permit a reasonable juror to find that Defendants entered into the charged market allocation agreement.” The court agreed.Holding. “[N]ot all no poach agreements are market allocations subject to per se treatment,” the court held, “and therefore, determining whether a no poach agreement is a market allocation is highly fact specific.” Based on the facts in Patel, the court found that, as a matter of law, the agreement at issue did not involve a market allocation under the per se rule because the “alleged agreement itself had so many exceptions that it could not be said to meaningfully allocate the labor market of engineers” between the firms.<a href="#_ftn5" target="_self" id="_ftnref5">[5]</a>The alleged agreement allowed, for instance, hiring between two of the defendants on a case‑by‑case basis with the other side’s consent. The restrictions on hiring also apparently shifted “throughout the course of the conspiracy.” Evidence showed that, at some point, certain restrictions were for just three to six months, whereas at other times defendants were told they could hire other defendants’ employees “when [it] really needed them.”While the court acknowledged that there were emails “suggesting a blanket agreement not to hire,” that apparently was not borne out in practice. “Hiring among the relevant companies was commonplace,” the court found, “throughout the alleged agreement.” The court identified only one purported year-long hiring freeze. And even then, there were still some limited exceptions. The court therefore held that, while the agreement may have constrained mobility to some degree, it did not “allocate the market” “to any meaningful extent.” In reaching this holding, the court denied it was imposing any new requirements for per se liability and suggested that, if anyone may be trying to make new law, it was the government:If anything, the government has tried to expand the common and accepted definition of market allocation in a way not clearly used before.<a href="#_ftn6" target="_self" id="_ftnref6">[6]</a>Practical TakeawaysDespite defendants’ clear victory, the court’s ruling does not mean that naked no-poach agreements are now exempt from criminal liability or the per se rule. The per se analysis is highly fact-specific, as was the court’s ruling. While it imposed some restraints on employee mobility, the agreement in Patel did not result in a blanket hiring freeze. The court instead found that hiring among the companies was “commonplace.”Even after Patel, this continues to be a largely unsettled area of the law. The ruling may make it harder for the DOJ to prevail in criminal prosecutions against no-poach agreements. But regardless, employers should continue to keep in mind that, even if criminal liability or prosecution is avoided, there can still be a risk of civil liability depending on the nature of the agreement. See, e.g., High-Tech cases. Courts and juries may be less reluctant, for instance, to find companies civilly as opposed to criminally liable. As the Patel court noted, courts “are obligated to construe criminal statutes narrowly so that Congress will not unintentionally turn ordinary citizens into criminals.”While Patel is yet another blow to the DOJ’s efforts, it is not clear whether the DOJ will continue to bring criminal cases against no-poach agreements or back off in light of its latest defeat.Whatever happens, employers should continue to consult with counsel before entering into agreements with restrictive covenants such as no-hires.<a href="#_ftnref1" target="_self" id="_ftn1">[1]</a> United States of America v. Mahesh Patel, et al., No. 3:21-CR-220 (VAB), 2023 WL 3143911, at *3 (D. Conn. Apr. 28, 2023).<a href="#_ftnref2" target="_self" id="_ftn2">[2]</a> Id.<a href="#_ftnref3" target="_self" id="_ftn3">[3]</a> A MoForward Warning Comes True: No Poach Enforcement Hits the Defense Industry.<a href="#_ftnref4" target="_self" id="_ftn4">[4]</a> <a href="https://www.justice.gov/atr/case-document/final-judgment-0" target="_self">U.S. v. Adobe Systems, Inc., et al.</a><a href="#_ftnref5" target="_self" id="_ftn5">[5]</a>United States of America v. Mahes Patel, et al., No. 3:21-CR-220 (VAB), 2023 WL 3143911, at *9 (D. Conn. Apr. 28, 2023).<a href="#_ftnref6" target="_self" id="_ftn6">[6]</a> Id. at n.7.

No-Poach Case Alert: DOJ’s No-Poach Strategy Dealt Another Blow As Court Tosses Case Before It Reaches Jury

No-Poach Case Alert: DOJ’s No-Poach Strategy Dealt Another Blow As Court Tosses Case Before It Reaches Jury

The U.S. Department of Justice’s (“DOJ’s”) ongoing efforts against no-poach agreements suffered their latest setback on April 28, 2023, following the Connecticut federal court’s ruling in U.S.A. v. Mahesh Patel, 

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).

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

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