At least two states, Michigan this year and Massachusetts in 2014, have proposed legislation to curtail / eliminate the rights of parties (i.e., employers) with respect to non-compete agreements. The Michigan proposal would make “void” any non-compete agreements not related to the sale of a business. California has banned these agreements for years and agreements in restraint of trade have been banned going back to 1414 in Dyer’s case, so presumably any constitutional challenges to such a ban have been vetted and failed, or else it has just been chalked up to being … California. But the California ban is not exclusive to employees residing in California, as parties and their lawyers often seek the application of Conflicts of Laws to have the law of one state applied in another state. In addressing the potential constitutional issue, courts have held that the employee’s right to be freely employed trumps the right to contract.

In contrast, in Wisconsin, there is a pending bill that would change that state’s history of restricted enforcement of restrictive covenants. So why all the attention to noncompete agreements in the employment context? Will these bills pass or are they just one of the many events of posturing or pandering that can be expected in all legislative branches? To highlight that this is an issue that makes a difference, we refer you an older post by Jonathan Pollard where the lawyers fought over whether or not Florida (favorable to noncompetes) or Minnesota (noncompete likely unenforceable) law would apply.

Recently, bloggers, including Christopher McKinney and Eric Meyer, have addressed this subject. Apparently the state legislatures believe there is sufficient evidence of employers being heavy handed (i.e., Jimmy Johns) in the application of non-competes, for which 99% or more probably never even get reviewed after execution, much less become the subject of enforcement / cease-and-desist letter writing or litigation. As noted, these agreements are being used not just in highly technical fields, such as manufacturing where trade secrets should be present, but in other low wage fields, including sandwich making.

Certainly, employers hold the greater bargaining power and resources over employees, and there is no doubt these agreements can have great value. Also, an employee about to take a new job or about to leave a job is in a vulnerable position, and (usually) cannot afford to litigate with the employer. These facts, coupled with the enforcement of these unilateral contracts against non-technical workers, there seems to be factual support for the need to take action to protect an employee, but will it work?

The policy question seems to be what basic right of the employer triggers the right to preclude an employee from taking another job, and under what circumstances? and at what point can the line be drawn between highly skilled workers (subject to restrictions) and low wage (not subject to restrictions). The existing state of the law creates opportunities for practical consequences far from the principles embodied in the analytical frameworks currently in use: Let’s look at a few examples:

Legitimate Business Interests: Many states’ case law provides that a business / employer must have a “legitimate business interest” to protect as a condition to seeking enforcement of a restrictive covenant in an employer-employee context. As noted by some commentators, the lawyer drafted cease-and-desist letter may often be sufficient to cause the employee to pause and chose a different route, which is, arguably, an unfortunate result based more on bullying than good policy.

Confidential Information: There is no uniform statutory definition of confidential information. This provision is often defined in an agreement, but in practicality ends up being anything non-public, until litigated, and due to the lack of importance of confidential designations as compared to privileged or trade secret determinations, this category rarely sees a reported decision further defining what could just as easily be defined differently the next time the parties interact.

Trade Secrets: No one seriously doubts the need to protect trade secrets. In fact, there are proposals in Congress about enacting a FTSA (Federal Trade Secrets Act). Trade secrets, however, are already protected via enactment of the UTSA (“Uniform Trade Secrets Act”) in 48 of the 50 states. As noted by Eric Welsh recently, the doctrine of inevitable disclosure “may” provide protection for employers even absent a non-compete agreement, however, given that this doctrine has been on the scene since 1997 and its adoption is still in question in many states, despite UTSA provisions for protecting the “disclosure or threatened disclosure” of trade secrets (and yes, I can and do cite to my own blog!), its adoption seems hardly “inevitable.” Also, the small business employers are, arguably, at a loss here as they are less likely to have have off the shelf employment agreements or templates for use when hiring, and also not likely to have access to counsel to pursue a civil action for a TRO and / or Preliminary Injunction in the event an employee leaves and is suspected of having taken valuable trade secrets. Still further, courts will often wonder how can they stop an employee from leaving under inevitable disclosure / UTSA to take the offending position if there is no non-compete agreement in place.

So how can a factfinder tell the difference between these above three categories, to the extent there is any difference between them in any given circumstance, short of litigating the dispute? Absent a stipulation between the parties that a trade secret exists, which is not likely to occur on the same terms as advocated by the proponent of the trade secret absent immediate judiciary oversight which is not typically available, these issues, like most all issues, must be litigated to the very end. This may be one of the problems with our present day judicial system, namely that some issues cannot be decided sooner rather than later, due to the alleged or perceived need for discovery on all issues.

Jurisdictional and choice of law disputes may be the focus of an employer-employee dispute for years in themselves, resulting in the parties not addressing the merits of their alleged dispute, namely can the employee leave and take the new job? Also, and hard to deny, such a delay will all but ensure that the employee is not going to be able to take the trade secrets to the new position. In the event of litigation, an injunction to protect the status quo is likely to be put into place, ergo, victory for the employer, even though such an injunction may allow the employee to work for the new employer under restricted terms.

This subject always leads to so many more issues. For example, if a state bans non-compete agreements, then what about non-solicitation agreements, or NDA’s (“Non-Disclosure Agreements”), which can often have the same effect and have been identified by courts as the functional equivalent of a non-compete and subjected to the same strict test for enforcement. There is much to be considered in the debate about whether non-competes should stay or go. States rights activists might say yes, because such a right is reserved to the states, but that position is also contrary to a libertarian philosophy of let’em work, let’em live.

It seems likely, however, that if more states follow California, collateral litigation will increase, and only the most sophisticated employers will be in a position to develop the toolbox necessary to protect their alleged rights via all available means. Probably the best way for an employer to ensure their ability to enforce their rights is to develop and maintain a “trade secrets” program and document it accordingly, including restricting what information is made available, etc. The UTSA is likely here to stay, but the continued viability of a non-compete in any given case may be negated by the various state law common law analysis (e.g., legitimate interests, geographic scope, term of restrictions, etc.), or even by statute.

Let us know what you think about the need for: (1) state bans on employee non-competes, or (2) a FTSA? and Why?


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