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.

Andrew Turnbull

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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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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>.

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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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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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

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.’”).

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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

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.

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

On July 12, 2022, the D.C. Council amended the Ban on Non-Compete Agreements Amendment Act of 2020 (the “Amendment”), walking back from an earlier version of the bill that, as previously discussed, contemplated a nearly total ban for employee non-competes. The Amendment, however, places significant limits on employee non-competes, including only permitting non-competes for certain highly compensated employees (currently earning $150,000 or more annually), limiting non-competes to a one-year, post-employment duration, mandating certain procedures and notices when entering non-competes, and adding anti-retaliation protections. Violations of the Amendment can result in monetary fines as well as administrative enforcement and private rights of action. Unless vetoed by Mayor Muriel Bowser or Congress, the Amendment is slated to go into effect on October 1, 2022.Read our <a href="https://www.mofo.com/resources/insights/220721-dc-council-waters-down-non-compete-ban" target="_self">client alert</a>.<div></div>

D.C. Council Waters Down Non-Compete Ban While Keeping Some Significant Limitations

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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

D.C. Council Waters Down Non-Compete Ban While Keeping Some Significant Limitations

Continuing the ongoing trend of states placing restrictions on employee non-competes, on May 10, 2022, the Colorado General Assembly passed a bill amending C.R.S. § 8-2-113 (the “Amendment”) and adding significant limitations on employee non-compete agreements. Most notably, the Amendment seeks to:<ul><li>Void all non-compete and customer non-solicit agreements, except for certain limited circumstances, such as non-competes with workers paid over the “highly compensated worker” threshold (currently $101,250 annually) and customer non-solicits with workers earning 60% of that threshold (currently $60,750 annually); </li><li>Require certain carve-outs to be included in employee confidentiality agreements;</li><li>Require mandatory notices be provided to new hires and current employees at specific times and separate and apart from the actual non-compete agreement; and</li><li>Mandate the use of Colorado law and venue for any workers who reside or work in Colorado at the time of termination.</li></ul>Read our <a href="https://protect-us.mimecast.com/s/EMH8Co268mtrBnMBOsz_LIG?domain=www2.mofo.com">client alert.</a>

Preparing for Colorado’s New Limits on Employee Non-Competes

Continuing the ongoing trend of states placing restrictions on employee non-competes, on May 10, 2022, the Colorado General Assembly passed a bill amending C.R.

Preparing for Colorado’s New Limits on Employee Non-Competes

On May 31, 2021, the Illinois General Assembly passed amendments to the Illinois Freedom to Work Act (the “Amendments”) that aim to impose significant new restrictions on employee non-compete and non-solicit agreements in Illinois.  Illinois Governor J.B. Pritzker is expected to sign the Amendments into law.  If that occurs, the Amendments would take effect on January 1, 2022.  The passage of the Amendments marks another point in the ongoing trend of jurisdictions enacting legislation that limits the use of non-competes and non-solicits with employees.Read our<a href="https://www.mofo.com/resources/insights/210630-illinois-ushers-new-restrictions.html"> client alert</a> for more information.

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Illinois Ushers In New Restrictions on Non-competes and Non-solicits

Illinois Ushers In New Restrictions on Non-competes and Non-solicits

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On May 31, 2021, the Illinois General Assembly passed amendments to the Illinois Freedom to Work Act (the “Amendments”) that aim to impose significant new restr

On January 11, 2021, District of Columbia Mayor Muriel Bowser signed the <a target="_blank" href="https://lims.dccouncil.us/downloads/LIMS/43373/Signed_Act/B23-0494-Signed_Act.pdf">Ban on Non-Compete Agreements Amendment Act of 2020</a> (“the Act”), effectively eliminating non-competes in Washington, D.C., except under very limited circumstances. The Act is anticipated to take effect on March 19, 2021. If the Act becomes effective, not only will it add D.C. to California, North Dakota, and Oklahoma as the jurisdictions in the U.S. completely banning post-employment non-competes, but it will go beyond those laws in prohibiting non-competes and anti-moonlighting policies during employment. The Act also continues the trend of states passing laws limiting the use of non-compete agreements.<h3>Coverage</h3>The Act applies to all private employers “operating” in D.C. It covers nearly all employees and prospective employees who perform work or are reasonably anticipated to perform work in D.C. for covered employers, with certain limited exceptions, including:<ul><li>Volunteers engaging in the activities of a nonprofit, educational, charitable, or religious organization; and</li><li>Medical physicians with a medical license, who completed residency, and make over $250,000 per year.</li></ul>Because there is no threshold for the amount of work employees must perform in D.C. to be covered by the Act, it is unclear whether the Act will apply to individuals based outside of D.C. that occasionally work in D.C. It is also unclear whether the phrase “operating within the District” will be interpreted to apply to private employers who do not maintain an office in D.C., but have employees who perform services or work in D.C.<h3>Covered Non-competes</h3>The Act bans covered employers from entering into or enforcing non-competes with covered employees, whether the non-competes are in a formal contract or part of the employer’s workplace policies or practices. Significantly, the Act bars non-competes and policies that prohibit employees from “simultaneously or subsequently” being employed by or performing services for another person or operating an employee’s own business. Accordingly, unlike other jurisdictions, such as California, that bar post-employment non-compete agreements, the Act goes one step further by banning non-compete agreements both during and after employment.<h3>Agreements Not Covered</h3>The Act does not impact any non-compete agreements that are signed before the effective date of the Act. The Act also expressly exempts non-compete agreements executed in connection with the sale of a business and agreements restricting employees from disclosing an employer’s confidential information or trade secrets. The Act is silent, however, as to whether agreements not to solicit an employer’s customers, vendors, or employees are prohibited.<h3>Effective Date</h3>Any non-compete agreements entered into after the Act is enacted will be void and unenforceable. The Act was sent to Congress on February 1, 2021 for review. Unless Congress rescinds the law, which seems unlikely given that the Democrats have the majority in both chambers of Congress, the Act is projected to be effective on March 19, 2021.<h3>Retaliation Prohibited</h3>The Act makes it illegal to retaliate or threaten to retaliate against an employee who refuses to agree to or comply with a non-compete agreement that violates the Act. Specifically, employers are prohibited from retaliating or threatening to retaliate against employees for:<ul><li>Refusing to agree to a non-compete provision;</li><li>Failing to comply with a non-compete provision, whether in an agreement or a workplace policy; or</li><li>“Asking, informing, or complaining about the existence, applicability, or validity of a non-compete provision or a workplace policy that the employee reasonably believes is prohibited under” the Act to an employer.</li></ul><h3>Enforcement and Penalties</h3>Employees have a right to either file an administrative complaint with the mayor or pursue a civil claim in court. The D.C. mayor and attorney general are responsible for administering and enforcing administrative claims under the Act. If the Act becomes law, the mayor will be required to issue rules to implement the Act. The D.C. mayor or attorney general may also require covered employers to make records required by the Act available for inspection. Employers found to violate the Act are subject to administrative fines ranging from $350 to $3,000 per violation.<h3>Notice to Employees</h3>If the Act becomes effective, employers must also notify employees in writing of the non-compete ban by using the following notice:No employer operating in the District of Columbia may request or require any employee working in the District of Columbia to agree to a non-compete policy or agreement, in accordance with the Ban on Non-Compete Agreements Amendment Act of 2020.The notice must be provided to existing employees no later than: (1) 90 days of the Act going into effect using certain specified text in the Act; (2) seven days after hiring; or (3) 14 days after the employer receives a written request for such statement from the employee.<h3>Looking Ahead</h3>Employers with operations in D.C. or employees who work within D.C. should review their agreements and policies in light of the potential, significant changes to D.C. law. Since the Act aims to ban both post-employment non-competes and anti-moonlighting policies, employers will need to determine what agreements or policies they can put in place to protect themselves from unfair competition either before the Act takes effect or without the use of non-competes. Employers may want to consider trying to get non-compete agreements in place before the law takes effect. In addition, employers should also consider updating their confidential information policies and agreements, as well as their non-solicitation clauses, to ensure they can protect their rights to the greatest extent possible.Because the Act might cover employees who only occasionally work in D.C., employers will also need to consider which employees might be covered by the Act. Although the Act will clearly apply to employees who are based in D.C., it remains to be seen whether employees only occasionally working in D.C. might be covered. Employers may want to consider whether they can use a choice of law provision in non-competes for non-D.C.-based employees to avoid the application of the Act.With the Act being the latest in a trend of jurisdictions across the United States cracking down on non-compete provisions, it is important to continue to monitor developments in this area that may impact an employer’s non-compete strategies and practices. As we previously <a target="_blank" href="https://elc.mofo.com/topics/Tightening-Restrictions-on-Noncompetes.html">reported</a>, other states have issued or have pending legislation significantly limiting the use of non-competes, including several states banning such agreements with low wage workers. It is also possible that there could be federal efforts to limit the use of non-competes under the Biden administration. On the campaign trail, President Biden said that he opposes non-compete clauses, “except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets.”

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The District of Columbia Joins Jurisdictions Banning Non-competes

The District of Columbia Joins Jurisdictions Banning Non-competes

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On January 11, 2021, District of Columbia Mayor Muriel Bowser signed the Ban on Non-Compete Agreements Amendment Act of 2020 (“the Act”), effectively eliminatin

This week, on August 3, 2020, the California Supreme Court issued its opinion in Ixchel Pharma, LLC v. Biogen, Inc., which resolved two questions regarding the standards to be applied for non-competition agreements and disputes between businesses in California. The first was whether a plaintiff in a dispute between businesses is required to plead an independently wrongful act in order to establish a claim for tortious interference with a contract that is terminable at-will, to which the court responded, yes. The second question, was what is the proper standard for determining whether California Business and Professions Code section 16600 (Section 16600) voids a non-competition agreement between two businesses, to which the court responded, the Rule of Reason.Read the <a href="https://www.mofo.com/resources/insights/200807-california-supreme-court.html" target="_blank">full client alert</a>.

California Supreme Court Clarifies Standards for B2B Non-Competition Agreements and Disputes in California

This week, on August 3, 2020, the California Supreme Court issued its opinion in Ixchel Pharma, LLC v. Biogen, Inc., which resolved two questions regarding the 

California Supreme Court Clarifies Standards for B2B Non-Competition Agreements and Disputes in California

Many employers have long used noncompetition agreements, or noncompetes, as an important tool for preventing former employees from unfairly competing against them.  Although only a few states outright ban noncompetes with employees,[1] most states permit employers to use noncompetes as long as they are reasonable and limited to protecting the employer’s legitimate interests.  In recent years, however, state legislatures have increasingly begun chipping away at the power of noncompetes by passing laws limiting the scope of those agreements.  And many other states are considering similar restrictions.An Overview of Recent ChangesIn the last several years, many states, including California, Idaho, Illinois, Nevada, New Mexico Massachusetts, and Washington, have enacted laws restricting the use of employee noncompetes.  Although the types of restrictions vary by state, those limitations generally include: <ul><li>Limiting the post-employment duration of noncompetes;</li><li>Banning noncompetes for certain “low wage” workers who are nonexempt under the Fair Labor Standards Act or who make less than a certain hourly rate;</li><li>Requiring employers to pay former employees during the period of the post-employment restriction;</li><li>Invalidating noncompetes for employees who were terminated without cause; and</li><li>Requiring noncompetes to be governed by the law of the state where the employees work.</li></ul>Some of the most sweeping changes to noncompetes were passed in Washington and Massachusetts.Washington StateOn May 8, 2019, the Washington governor signed House Bill 1450 into law imposing significant limits on noncompetes.  The new law, which goes into effect on January 1, 2020, places a number of roadblocks for employers intending to issue new noncompetes for their employees or even to enforce existing agreements.  Some of the more significant requirements include:<ul><li>Invalidating post-employment noncompetes of 18 months or more, unless an employer can demonstrate with “clear and convincing evidence that a duration longer than 18 months is necessary to protect business or goodwill”;</li></ul><ul><li>Barring the use of noncompetes for employees earning less than $100,000 per year or independent contractors earning less than $250,000 per year (with both numbers adjusted annually for inflation); </li></ul><ul><li>Requiring employers to disclose noncompete terms to certain candidates in writing before they accept an offer of employment, including candidates who are offered annual pay below the earning thresholds listed above;</li></ul><ul><li>Mandating “independent consideration” beyond continued employment if an employee enters a noncompete during his or her employment;</li></ul><ul><li>Continuing to pay an employee’s base salary during the post-employment restricted period for employees who are terminated due to a “layoff” (what constitutes a layoff is undefined); and</li></ul><ul><li>Requiring Washington law to govern any noncompete applicable to a Washington-based employee.</li></ul>Washington law goes further than other state noncompete laws by penalizing employers for noncompliance.  If a court or arbitrator rejects, reforms, modifies, or, even, partially enforces a noncompete, it must require the employer to pay the employee the greater of $5,000 or the employee’s actual damages plus the employee’s costs and attorneys’ fees.  This applies to all noncompete proceedings commenced after January 1, 2020 to enforce the restriction, regardless of when the noncompete was entered. MassachusettsMassachusetts’ new law restricting noncompetes went into effect on October 1, 2018.  Like Washington, Massachusetts added a number of new requirements for noncompetes with Massachusetts based employees.  Some of the more onerous requirements include:<ul><li>Limiting the duration of noncompetes to twelve months post-employment, unless the employee breaches his or her fiduciary duties to the employer or unlawfully takes the employer’s property, in which case the duration can be up to twenty-four months;</li></ul><ul><li>Mandating employers pay at least half of the employee’s highest base salary in the two year period prior to termination of employment, or other “mutually agreed upon consideration”;</li></ul><ul><li>Requiring more than continued employment as the consideration necessary to support a noncompete;</li></ul><ul><li>Requiring the noncompete to be governed by Massachusetts law, and, if the agreement includes a forum selection provision, it must, with limited exceptions, require disputes be litigated in Massachusetts courts;</li></ul><ul><li>Prohibiting noncompetes for employees classified as nonexempt under the Fair Labor Standards Act or employees who are laid off or terminated without cause; and</li></ul><ul><li>Requiring ten days written notice of the noncompete to prospective employees, with at least 10 days’ notice.</li></ul>Hostile Trend Towards Noncompetes Likely To ContinueThe increasing number of noncompete laws is likely to continue as more states consider issuing similar laws limiting noncompetes with employees.  Indeed, as many as 20 states and the federal government are seeking to weaken noncompetes in some way.  On the federal level, Senator Marco Rubio of Florida has introduced a bill that would ban noncompetes for most employees classified as nonexempt under the Fair Labor Standards Act.  Arkansas, Vermont, and Pennsylvania have pending bills seeking to completely ban the use of noncompetes for employees in those states, though like California, these laws would probably not apply to noncompetes in the sale of business context.  The New Jersey Senate is also considering a bill with restrictions largely emulating those instituted by Massachusetts. Legislatures are not alone in tightening restrictions on noncompetes.  Both the Illinois and New York Attorneys General have pursued enforcement actions against employers who use noncompetes, including entering into a settlement agreement with Jimmy John’s to prevent it from having noncompetes with its sandwich makers.  More recently, WeWork entered into a settlement agreement with the New York and Illinois Attorneys General, in which WeWork agreed to rescind noncompetes for certain categories of employees, narrow the scope of those agreements with others, and use new, less restrictive language in its noncompete agreements going forward.What This Means for EmployersGiven the growing number of limitations placed on noncompetes, employers may need to rethink their strategies for using noncompetes to prevent their former employees from unfairly competing.  Long-used form agreements may need to be rethought, alternative ways to prevent unfair competition may need to be explored, and existing agreements with key employees may need to be redrafted. Companies operating in multiple jurisdictions should revisit their noncompete agreements, particularly if they are using the same template agreement across their organization.  Noncompetes that are lawful in one state may now expose the employer to liability if signed by, for example, a Washington-based employee.  Employers should consider working closely with in-house and outside counsel to ensure that any noncompetes protect the employers’ interests rather than endanger them.Employers may also want to consider whether other types of post-employment restrictions, such as nonsolicitation or nondisclosure agreements, could achieve their goals.  Notably, the growing chorus of state noncompete laws generally do not apply to agreements prohibiting former employees from soliciting the employer’s employees or customers or prohibiting disclosure of the employer’s confidential information.  In some instances, nondisclosure and nonsolicitation agreements may be equally effective as noncompetes in protecting the employers from unfair competition.  Employers might also consider agreements that do not expressly prohibit an employee from working for a competitor, but encourage them not to compete.   For example, some states, like New York, apply a relaxed standard of review for agreements that require former employees to forfeit post-employment payments if they work for a competitor. [1] States currently banning noncompetes restricting employees from working for a competitor after their employment are California, North Dakota, and Oklahoma.

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Tightening Restrictions on Noncompetes

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Many employers have long used noncompetition agreements, or noncompetes, as an important tool for preventing former employees from unfairly competing against th