Laws are usually not static, and in the realm of restrictive covenants, change abounds. Congress continues to threaten the viability of non-compete clauses, state attorneys general—flanked by academics, labor unions, and other advocates—have applied pressure on the FTC to promulgate rules banning non-competes, and state legislatures hope to stifle their reach.
Employers, with their attorneys, should review their covenants with a fine-tooth comb, and here are a few ways employers can increase the likelihood that their covenants pass muster. (Restrictive covenants are present in contexts beyond the employer and employee relationship, e.g., franchise or subcontractor agreements or in the context of the sale of a company or dissolution of partners. This Practice Point, however, will focus exclusively on the employer-employee context and, in some respects, on independent contractors.)
- Employers should routinely refine their restrictive covenants. The narrower the covenant, the greater the chance of its enforceability. Tie the covenants to a legitimate business interest (e.g., personnel with access to customer list or other confidential information) and ensure they are reasonable in terms of duration (e.g., one year to 18 months), geographic scope (e.g., territory of employment), and prohibited activities (e.g., employee’s specific job function).
In some jurisdictions, such as Oregon and Massachusetts, courts will strike down covenants longer than 18 months. In others, like Washington, there is a rebuttable presumption of non-enforceability if covenants are longer than 18 months. Recently, states have begun restricting the enforceability of non-competes against low-wage workers. Some jurisdictions will fine companies for violating their statutes, to say nothing of the possible governmental enforcement actions for violations.
- Regularly disseminate notice of restrictive covenants to prospective and current employees. Failure to do so may seem like a technicality, but it may be enough in some states (e.g., Oregon, Massachusetts, Washington) to sink a lawsuit to enforce covenants.
- Include restrictive covenants in other agreements that covenant laws do not apply to, such as separation, confidentiality, non-disclosure of trade secret, and independent contractor agreements. Relatedly, consider garden leaves; that is, offer compensation after termination since some jurisdictions will not enforce a covenant without compensation beyond the termination date. In Massachusetts, employers must remit during the restrictive period 50 percent of the employee’s highest salary within the past 2 years prior to the termination date, and separation agreements may be ineffective unless the employee has at least 7 business days after execution to rescind the acceptance.
- Prepare for defenses against enforcement lawsuits. Even with a narrow covenant, it may be unenforceable. For instance, there may be a minimum duration required, as in Maine, which requires a 6-month waiting period from the execution of the covenant before enforcement of the agreement and will not enforce the covenant during the first year of employment. Jurisdictions like Massachusetts will not enforce covenants if an employer terminates an employee without cause.
Unsurprisingly, employees may file anti-SLAPP (strategic lawsuits against public participation) motions to dismiss, claiming that covenant agreements stifle their constitutional right of free speech and association. This defense is available in approximately 33 states, including Washington, D.C. In Texas, employers may seek a commercial exception, where the lawsuit does not involve a matter of public concern but rather a private right to protect a commercial interest.
- To ease the request for injunctive relief, add a waiver of requirement to post bond. Given the length of lawsuits nowadays, seeking non-compensatory legal remedies may be moot if the covenant has expired; to prevent this, include a tolling agreement during the period of breach. Finally, consider covenant-friendly forum selection or choice-of-law provisions, although note that these are unavailable in Washington, North Dakota, and possibly California.
Idly relying on restrictive agreements entered before the effective date of new legislation may prove damaging. Despite the constitutional implications, the new law in Washington, for example, has a retroactive provision that appears to invalidate older restrictive agreements that are now prohibited. Vermont, Pennsylvania, and Virginia may soon follow California’s and North Dakota’s position to ban non-competes altogether. Not all is lost, as there are creative ways to enforce covenants even in these jurisdictions, such as including them in compensation plans subject to ERISA. Nevertheless, employers should assess the restrictive-covenant legal landscape and respond accordingly. For a recap of recent trends, we encourage requesting Seyfarth Shaw’s 2019-2020 edition of its 50 State Desktop Reference.
Erik Weibust is a partner with Seyfarth Shaw in Boston, Massachusetts. Jasmine Stanzick is an associate in the firm's Chicago, Illinois, office. James Billings-Kang is an associate in the firm's Washington, D.C., office.
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