Non-Compete Agreement / Covenant Not to Compete

D.C. Council Passes Amendment to Scale Back Ban on Non-Compete Agreements

August 29, 2022 | Peter S. Lubin and Patrick Austermuehle

After passing one of the strictest non-compete laws in the nation, the District of Columbia Council has responded to criticisms about the bill by passing the Non-Compete Clarification Amendment Act of 2022 which significantly scales back key aspects of the non-compete ban law enacted back in 2021 but which has not yet gone into effect after the Council has delayed its enactment several times in response to feedback from employer groups.

The non-compete ban, passed by the Council in 2020 and enacted in 2021, sought to impose a near-universal ban on simultaneous and post-termination employment restrictions for employees working in D.C. Since the inception of the ban, it has been subject to much criticism and numerous extensions of its effective date. However, the Clarification Amendment, which will take effect on October 1, 2022, changes the scope of the ban from nearly all non-compete agreements to only those whose total annual compensation is less than $150,000 ($250,000 for medical specialists). Compensation is defined to include more than just salary but accounts for bonuses, commissions, overtime premiums, and vested stock as well but does not include “fringe benefits other than those paid to the employee in cash or cash equivalents.”

The Clarification Amendment will now proceed to the desk of the Mayor, where it is expected to be signed, and then will be subject to a 30-day congressional review period which likely will expire in mid-to-late November. The amendment contains a number of significant “clarifications” to the non-compete ban law and gives D.C. employers options for utilizing non-compete agreements and other policies, such as conflict of interest policies, that were set to be prohibited. Continue reading ›

FTC Action Limits Scope of Non-Compete Agreement in Sale of Business

August 21, 2022 | Peter S. Lubin and Patrick Austermuehle

We have previously written about President Biden’s Executive Order in which he encouraged the Federal Trade Commission (FTC) to crack down on the “unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Since the issuance of that Executive Order the FTC has ramped up its efforts to curtail the use of such restrictive covenants using existing antitrust and unfair competition laws. Additionally, the FTC held a two-day workshop in December 2021, called “Making Competition Work: Promoting Competition in Labor Markets,” at which industry leaders and professionals held panel discussions on antitrust and labor issues.

However, until recently, the FTC had not issued any formal guidance outlining its strategy for accomplishing the outcome sought in the President’s Executive Order. Recently the FTC began to articulate a unified strategy to respond to the President’s challenge. Last month, we began to see the agency’s execution of that strategy.

In June, the FTC published an administrative complaint challenging an acquisition by Arko Corporation and its subsidiary GPM Investments, LLC of 60 gasoline and diesel fuel outlets located in Michigan and Ohio from the Corrigan Oil Company. As part of the sale, Corrigan agreed not to compete against Arko and GPM in the areas surrounding the 60 fuel outlets included in the sale, as well as other GPM locations encompassing in total more than 190 locations. The restrictive covenant part of the sales agreement precluded Corrigan from participating in the sale, marketing, and supply of gasoline and diesel fuel in the territory surrounding these locations.

The FTC’s complaint challenged the sale as anticompetitive because of the particulars of the non-compete provisions in the sales agreement and its anticompetitive effect on the impacted markets. As mentioned, the fuel outlets being acquired are located in Michigan and Ohio. However, the FTC has alleged that the non-compete provisions reduced (or eliminated) GPM’s competitors in market territories throughout Michigan, and lacked any “reasonable procompetitive justification” for their application to the GPM locations unrelated to the transaction. The FTC alleges that these covenants not to compete violate Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act. Continue reading ›

Texas Court Enjoins Employees from Working for Competitor Despite Lack of Non-Compete Agreement

August 2, 2022 | Peter S. Lubin and Patrick Austermuehle

As non-compete agreement attorneys, we often write on the topic of restrictive covenants and developments in the area of law across the country. Frequently, we review judicial opinions that involve courts analyzing the specific terms of non-compete agreements in order to determine whether to uphold or invalidate such agreements. In this post, we will examine a recent decision in which a former employer succeeded in obtaining a temporary restraining order (TRO) enjoining several former employees from working for a competitor. The twist in this case is that none of the former employees are accused of violating a non-compete agreement by working for the competitor because none of the former employees had a non-compete agreement.

DistributionNOW (DNOW), the plaintiff in the suit, is a Houston-based distribution company for the energy sector. The defendants in the suit are several former employees who left DNOW to work for a competitor, Permian Valve. According to the former employer’s complaint, the four defendants left DNOW to join a competitor and allegedly took confidential files and documents containing sensitive and proprietary information with them. Additionally, the complaint accuses one of the defendants, Toby Eoff, of poaching at least 20 employees from DNOW to join the competitor.

Eoff was the former majority owner of Odessa Pumps, a company that DNOW purchased for over $170 million. The complaint alleges that Eoff stayed with DNOW until he retired in April 2022 from his position as Executive Vice President. After retiring, the complaint alleges that Eoff took with him multiple files that contained “highly sensitive DNOW business information.” The complaint also alleges that another of the defendants took an employee list with him when he left DNOW. Continue reading ›

New Jersey Considering Major Changes to Non-Compete Law

June 26, 2022 | Peter S. Lubin and Patrick Austermuehle

Earlier this month, the New Jersey Assembly’s Labor Committee passed bill A3715, designed to sharply limit the availability, use, and enforceability of restrictive covenants such as non-compete agreements by New Jersey employers. The stated purpose of the bill is to preclude the use of certain post-employment restraints of covenants with certain groups of employees including low-wage workers, students, employees under 18 years old, and seasonal and temp workers. The bill would also preclude the use of restrictive covenants with independent contractors. This new bill is similar in many ways to bills that have been proposed in various state legislatures recently and enacted into law in states such as Massachusetts, Illinois and Washington.

Bill A3715 seeks to codify certain common law restrictions on the use of non-compete agreements including those regarding the scope of a non-compete, which require that a non-compete be no broader than necessary to protect the employer’s legitimate business interests. The bill also seeks to introduce new obligations and restrictions including a notice requirement, duration limitations, geographic limitations, garden leave requirement, and choice of law restrictions. Additionally, the bill would eliminate the “blue pencil” doctrine, by precluding a court from judicially modifying or revising an overbroad or impractical restrictive covenant so that it is judicially enforceable while still reflective of the parties’ intent.

If enacted, employers would be required to provide employees with at least 30 business days’ notice of the terms of the non-compete either before the employment begins or the non-compete becomes effective. Additionally, an employer must provide a post-employment notice to employees within 10 days from the termination of employment stating whether the employer intends to enforce its restrictive covenants.

The bill would limit the duration of such restrictive covenants to 12 months from the termination of employment. It would also prevent employers from enforcing covenants not to compete against former employees who simply leave the state of New Jersey, which could severely limit the effectiveness of such restrictions given the state’s relatively small size and proximity to populous neighboring states such as New York. Additionally, the geographic scope of non-competes would be limited to the geographic area in which the employee worked or had a material presence during the two years preceding termination of the employment. Continue reading ›

Colorado Legislature Passes New Restrictions on Use of Non-Compete Agreements

June 7, 2022 | Peter S. Lubin and Patrick Austermuehle

The Colorado legislature recently passed a bill, now awaiting the governor’s signature, which will substantially limit the ability to enforce non-compete agreements against any workers other than those who are deemed “highly compensated.” In addition, the new law will impose new, stringent notice requirements and penalties if employers fail to comply with the new statutory requirements. If the governor signs the bill, which he is expected to do, the law will go into effect this August, giving employers only a few months to put into place processes to ensure compliance with the law’s new requirements. This bill comes on the heels of a recent change to Colorado’s non-compete law which criminalized the enforcement of non-compete agreements that violate its general non-compete statute.

Colorado’s non-compete statute, C.R.S. § 8-2-113, was relatively unchanged for the roughly four decades from 1982, when it was enacted, until 2021. The law generally prohibited agreements not to compete but excepted restrictive covenants in contracts for the purchase of a business or its assets, agreements to protect trade secrets, and agreements with executive and management personnel and their professional staff. It also allowed employers to recover the expense of educating and training employees who left employment less than two years after being hired. And while the law made non-compete agreements with physicians void, it permitted the recovery of monetary damages against a physician who breached the agreement, though not against physicians treating patients with rare medical conditions. In 2021, the Colorado legislature amended the law to make an employer’s violation of the law a Class 2 misdemeanor. Continue reading ›

Restrictive Covenants in Shareholder Disputes

April 22, 2022 | Peter S. Lubin and Patrick Austermuehle

Covenants not to compete and non-solicitation agreements are frequent fixtures of employment agreements. They are also frequently found in operating, shareholder or partnership agreements. Though courts and legislatures across the country have become increasingly hostile to the notion of enforcing non-compete agreements against employees, courts have not displayed a similar reluctance to enforce restrictive covenants in shareholder disputes.

When shareholders have a dispute or desire to sell their interest in a company, restrictive covenants seek to protect the existing company and shareholders by placing limitations on what departing shareholders can and cannot do in terms of competing with the business. Non-compete agreements place limits on where and when and how a departing shareholder may compete against the company. Non-solicitation agreements place limits on who the departing shareholder may solicit for business or employment. Typically, non-solicitation agreements prohibit a departing shareholder from contacting the company’s customers or employees to convince them to leave for the departing shareholder’s new business. In disputes involving a departing shareholder, courts will often side with the existing business against a shareholder who has left the company and now seeks to compete against it.

As in every case involving restrictive covenants, whether a non-compete or non-solicitation agreement is enforceable depends largely on the language of the covenants in the applicable agreement. When deciding whether to enforce a non-compete or non-solicitation provision in a shareholder agreement, court will consider the reasonableness of the restraints. Continue reading ›

President Biden’s Executive Order Encourages Federal Agencies to Increase Crackdown on Use of Non-compete Agreements

October 3, 2021 | Peter S. Lubin and Patrick Austermuehle

The federal government has increased its efforts to curtail the abuse of restrictive covenants such as non-compete agreements, non-solicitation agreements, and no-poaching agreements. In July of this year, President Biden signed the Executive Order on Promoting Competition in the American Economy, which encourages the Federal Trade Commission (FTC) to make use of its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

Federal agencies have already been utilizing antitrust and unfair competition laws to combat the abusive use of restrictive covenants. The Department of Justice (DOJ) and the FTC are the two federal agencies authorized to enforce antitrust laws. The two federal laws primarily used by these agencies are the Sherman Antitrust Act, 15 U.S.C. 1 et seq., and the Fair Trade Commission Act, 15 U.S.C. 41 et seq. The Sherman Act makes illegal contracts in “restraint of trade or commerce.” The Fair Trade Commission Act prohibits “unfair methods of competition” and “unfair or deceptive trade practices.” The Supreme Court has held that any violation of the Sherman Act necessarily violates the Fair Trade Commission Act.

The Department of Justice has been cracking down on the use of no-poaching agreements between competitors since 2010. The DOJ’s Antitrust Division has been prosecuting “horizontal” (i.e. agreements between competitors) no-poaching agreements under the Sherman Act. In September 2010, DOJ announced it had reached a settlement with several large technology companies who had agreed not to “poach” each other’s employees. Continue reading ›

Governor Pritzker Signs New Law Changing the Game on Non-Compete Agreements

September 20, 2021 | Peter S. Lubin and Patrick Austermuehle

As we previously wrote about, this May the Illinois legislature passed a major bill that significantly alters how and when employers can use restrictive covenants, such as non-compete and non-solicitation agreements, with Illinois employees. As expected, Governor JB Pritzker signed the bill into law. It will go into effect January 1, 2022, and will only apply to agreements entered into after that date.

The new law amends the Illinois Freedom to Work Act and serves both to codify existing requirements under Illinois case law but also to impose new restrictions on Illinois employers as to when, with whom, and under what circumstances they may use restrictive covenants with employees. The goal of the new bill is to clarify when Illinois courts will and will not enforce non-compete and non-solicitation agreements.

The current version of the Freedom to Work Act defines a “covenant not to compete” as an agreement between an employer and a low-wage employee that restricts such low-wage employee from performing:

any work for another employer for a specified period of time;
any work in a specified geographical area; or
work for another employer that is similar to such low-wage employee’s work for the employer included as a party to the agreement.

Illinois Set to Impose New Restrictions on Use of Non-Compete and Non-Solicitation Agreements

June 27, 2021 | Peter S. Lubin and Patrick Austermuehle

Illinois recently joined a growing list of states that have passed laws constraining the use of restrictive covenants by employers. The Illinois legislature passed Senate Bill 672 which imposes significant limitations on the use by Illinois employers of non-compete and non-solicitation agreements. The bill achieves this by amending the Illinois Freedom to Work Act to establish new requirements for agreements containing restrictive covenants and to codify standards for the use of non-solicitation agreements. Governor Pritzker is expected to sign the bill into law. Once signed by the governor the bill would take effect on January 1, 2022, though significantly the bill would not apply retroactively and would only apply to restrictive covenants entered into after this date.

Illinois’ Freedom to Work Act, originally passed in 2017, prohibited “covenants not to compete” for “low-wage employees,” defined as those earning the greater of minimum wage or up to $13.00 per hour. The Act only addressed covenants not to compete, leaving employers unsure as to whether the statutory limitations also applied to provisions prohibiting former employees from soliciting the employer’s employees or customers. The newly passed bill clears up that uncertainty by amending the Act to apply explicitly to non-solicitation agreements as well. The bill explicitly defines the term “covenant not to solicit” broadly as any agreement that “(1) restricts the employee from soliciting for employment the employer’s employees or (2) restricts the employee from soliciting, for the purpose of selling products or services of any kind to, or from interfering with the employer’s relationships with, the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.”

The bill additionally clarifies that “covenants not to compete” do not include confidentiality or nondisclosure agreements, trade secret protection agreements, invention assignment agreements or covenants, agreements by which the employee agrees not to reapply for employment to the same employer after termination of the employee or, importantly, agreements entered into in connection with purchase and sale transactions.

Significantly, the bill replaces the definition of “low-wage,” which referred only to hourly wages, with an annualized earnings requirement, joining states like Washington and Maine. The bill would prohibit employers from entering into non-compete agreements with employees who earn $75,000 per year or less. The bill incrementally increases the earning threshold every 5 years through 2037. The earning threshold increases to $80,000 per year beginning on January 1, 2027, $85,000 per year beginning on January 1, 2032, and $90,000 per year beginning on January 1, 2037. A covenant not to compete entered into in violation of the bill is void and unenforceable. Continue reading ›

Swimming Coach Sued by Former Employer for Launching Competing Company — Chicago Non-Compete Agreement Lawyers

January 16, 2021 | Peter S. Lubin and Patrick Austermuehle

If you think you’d be better off leaving your job to start your own company that does the same thing as your employer, you’d better check the terms of your employment contract first. A swimming coach based in New Jersey, John Alaimo, worked for NYS Aquatics Inc. of Goshen, which has run the “New York Sharks” swim team since 2003. Although Alaimo renewed his contract with NYSA in the fall of 2019, less than a year later, in the summer of 2020, he started his own swimming company that likewise had a shark-themed name: Shark Swimming, LLC.

NYSA responded by suing Alaimo and two other swim coaches for breach of contract, citing both non-compete and non-solicitation clauses in their employment contracts.

A non-compete agreement states you cannot work for a competitor of your employer, usually within a certain geographic distance and a certain timeframe after your employment with them has ended. A non-solicitation agreement states you cannot solicit clients, vendors, or other employees of your employer to do business with your new employer. It’s also common to have a time limit on that requirement.

It’s unclear whether Alaimo’s non-compete and/or non-solicitation agreements were limited by time, but it doesn’t matter because Alaimo was still under contract with NYSA at the time that he founded his competing company. Continue reading ›