The Federal Trade Commission (FTC) has reaffirmed that it will pursue noncompete enforcement through individual cases rather than sweeping rulemaking. In a recent public workshop featuring each of the sitting commissioners and panels of economists and current and former agency attorneys, the FTC stopped short of signaling that it will pursue a new national rule to govern all noncompetition agreements. Instead, the FTC emphasized it will continue to pursue enforcement on a case-by-case basis,1  with a focus on agreements that are overly broad in scope or duration and not narrowly tailored to protect legitimate business purposes. Key Takeaways The FTC indicated it is not pursuing a national rule to ban noncompetition agreements but will continue bringing targeted enforcement actions against agreements it deems overly broad or unjustified. The agency emphasized it views certain noncompetition agreements, particularly those involving lower-wage or non-specialized roles, as anticompetitive and legally suspect, especially when they lack a clear business justification. Employers should review existing noncompete agreements to ensure they are narrowly tailored, reasonable in scope and duration and grounded in a legitimate business interest. Read the full update here.

Key Takeaways FTC to revisit a national non-compete ban: The FTC will host a Jan. 27, 2026 workshop as it restarts efforts to regulate or potentially ban most non-competition agreements nationwide. Renewed effort follows prior rule’s collapse: The workshop comes after the FTC’s 2024 final rule banning non-competes was blocked in court, vacated and ultimately abandoned due to legal and administrative challenges. Future national standard possible: The workshop may signal the first step toward a new FTC rule, despite current non-compete enforceability continuing to vary significantly by state law. The FTC appears poised to renew its years-long effort to address, and potentially ban, most non-competition agreements on a national level. On Jan. 27, 2026, the Federal Trade Commission will host a workshop titled, “Moving Forward: Protecting Workers from Anticompetitive Noncompete Agreements.” The FTC reports that the workshop “will include public statements from FTC Commissioners, victims of unfair and anticompetitive noncompete agreements and leading experts in the field.” The workshop follows years of national attention and contentious litigation regarding the FTC’s prior attempt to impose a national ban on most non-competition agreements. The FTC’s effort started in January 2023, when the FTC proposed a rule to ban most non-competition agreements. In April 2024, the FTC issued a final rule banning most non-competition agreements nationwide effective Sept. 4, 2024, but employer groups quickly filed lawsuits challenging the rule. In August 2024, a Texas district court enjoined the final rule’s enforcement as arbitrary and capricious. The FTC appealed the injunction to the Fifth Circuit but subsequently vacated the final rule and dropped the appeal, citing legal issues and administrative changes. Now, it appears that the FTC is ready to take up the issue again — and the January workshop could be the first step towards issuing another rule that would provide a national standard for addressing non-competition agreements. Currently, the validity and enforceability of non-competition agreements are governed by state law, which varies widely from state to state. The workshop will be held from 1-5 p.m. ET on Jan. 27, 2026, and it will be open to the public. Attendees must register in advance to attend in person at the FTC’s headquarters or attendees may attend via livestream. Polsinelli Restrictive Covenant Attorneys will be in attendance at the workshop. If you currently have or are thinking about implementing non-competition agreements in your workforce, it is important to have an attorney well-versed in non-competition law review your agreements for compliance with all applicable state laws. Please contact your Polsinelli attorney for help reviewing or updating your agreements and broader non-compete strategy.  

Key Highlights End of nationwide ban efforts: The FTC has officially moved to dismiss its appeals and voted to vacate its proposed nationwide non-compete ban, signaling the end of its push for a universal prohibition. Shift to targeted enforcement: While dropping the broad ban, the FTC remains committed to scrutinizing non-competes on a case-by-case basis, particularly in industries like healthcare and staffing where such agreements are prevalent. Immediate employer impact: On Sept. 10, 2025, the FTC sent letters to large healthcare and staffing employers urging a review of non-competes and restrictive agreements, indicating an enforcement focus in those sectors, alongside a broader public inquiry open until Nov. 3, 2025. Guidance for compliance: Commissioner Meador outlined key factors that the FTC will consider when assessing non-competes, including wage and skill level, scope and duration, less restrictive alternatives and market power — making it essential for employers to review and refine their covenants to align with federal scrutiny and evolving state laws. On Sept. 5, 2025, the FTC moved to dismiss its appeals of injunctions blocking the enforcement of the non-compete ban it sought to implement nationwide last year. That same day, the FTC voted 3-1 to take steps to vacate the ban. These moves mark the end of the FTC’s efforts to implement a universal ban on non-competes, following a change in administration and FTC leadership. However, recent FTC actions suggest the agency remains focused on non-compete agreements, especially in the healthcare and staffing industries. Renewed scrutiny: Rather than pursuing a blanket ban, the FTC is pivoting to case-by-case enforcement and targeting covenants that it views as unfair or anticompetitive. On Sept. 10, 2025, the FTC sent letters to several large healthcare employers and staffing firms urging them to conduct a comprehensive review of their employment agreements — including any non-competes or other restrictive agreements — to ensure they are appropriately tailored and comply with the law. These letters suggest the FTC intends to initially direct its scrutiny of non-competes to the healthcare and staffing industries The FTC’s move parallels state-level action in places like Colorado, Texas and Pennsylvania, which have adopted stricter limits on non-competes in health care, as previously reported by Polsinelli. In addition, the FTC has also launched a public inquiry — open until Nov. 3, 2025 — through which the public may submit information that may be used to inform future enforcement actions. Importantly, this public inquiry is not limited to the healthcare or staffing industries, meaning the FTC’s scrutiny may expand to other sectors. FTC provides roadmap to enforcement priority: In announcing the FTC’s intent to revoke the non-compete ban, Commission Meador issued a statement identifying several contextual and legal factors to help evaluate non-compete provisions: Employee wage and skill level; Deployment in a distribution network (for example, non-competes in the franchise context); Independent contractors; Likelihood of free riding (employer investments in training, employee access to confidential information); Availability of less restrictive alternative; Scope and duration; Market power; and Evidence of economic effects. Impact on current non-competes: Employers should carefully review their non-compete covenants to ensure they are carefully drafted and aligned with both federal and state law. The FTC has made it clear that enforcement is coming — just not through a single sweeping rule. Additionally, in light of the factors from Commissioner Meador, employers should consider their overall non-compete strategy, including which workers are required to enter non-competes and whether alternative tools are available to protect their business interests. Please contact your Polsinelli attorney for help reviewing or updating your agreements and broader non-compete strategy.    

Colorado generally prohibits restrictive covenants, except in narrow circumstances. On May 8, 2025, the Colorado Legislature passed Senate Bill 25-083, which imposes three significant new limitations on the use of restrictive covenants for certain healthcare providers and narrows their application in business sales. These changes will apply to agreements entered into or renewed on or after August 6, 2025. Current Law Overview Under current law (C.R.S. § 8-2-113), non-compete and customer non-solicitation agreements are enforceable only in certain circumstances. For instance, non-competes are enforceable for “highly compensated individuals” when the agreement is reasonably necessary to protect an employer’s trade secrets. However, covenants that restrict a physician’s right to practice medicine after leaving an employer are already void under Colorado law. Key Changes Under SB25-083 Broader Ban on Non-Competes for Healthcare Providers The amendment prohibits non-compete and non-solicitation agreements for certain licensed healthcare providers, even if they meet the "highly compensated" threshold. This includes those who: Practice medicine or dentistry Engage in advanced practice registered nursing Are certified midwives Fall under additional categories listed in C.R.S. § 12-240-113 Liquidated Damages in Physician Contracts Previously, physician employment agreements could include liquidated damages tied to termination or competition. This amendment removes that provision, meaning that: Agreements with unlawful restrictive covenants are unenforceable. Agreements without unlawful provisions remain enforceable and may still carry damages or equitable remedies. It remains unclear whether competition-related liquidated damages are still enforceable under the new law. Expanded Patient Communication Rights Medical providers can no longer be restricted from informing patients about: Their continued medical practice New professional contact information The patient’s right to choose their healthcare provider Confidentiality and trade secret agreements are still allowed, as long as they don’t prevent sharing general knowledge. New Limitations on Business Sale Non-Competes Colorado law has long permitted non-competes in connection with the purchase or sale of a business. SB25-083 narrows this by: Allowing non-competes only for owners of a business interest Placing time limits on non-competes for minority owners or those who received ownership through equity compensation For these individuals, the non-compete duration is capped using a formula: Total consideration received ÷ Average annual cash compensation in the prior two years, or the duration of employment if less than two years. For questions and assistance regarding the upcoming changes to restrictive covenants in Colorado, please contact your Polsinelli attorney.

Sweeping changes to noncompete covenants are set to take effect on September 1, 2025, for health care employers in Texas. These changes stem from recent amendments to Texas’ noncompete statute. These changes will: Expand Texas’ heightened enforceability requirements to nearly all health care practitioners. Impose strict limits on the duration and geographic area of applicable noncompete covenants. Cap the buyout option that must be provided to covered health care practitioners. Who Is Impacted? The recent amendments to Texas’ noncompete statute were enacted through Texas Senate Bill 1318 (SB 1318) that was signed into law by Governor Abbott on June 20, 2025. It will impact Texas-licensed physicians, dentists, nurses (including advanced practice nurses), physician assistants, and health care entities that execute noncompete covenants with the aforementioned health care practitioners. Downstream, these amendments have the potential to alter various health care business models, and the value assigned to health care entities in mergers and acquisitions. What Are the Key Changes? Since 1999, the Texas noncompete statute has imposed heightened requirements for securing enforceable covenants with physicians licensed by the Texas Medical Board. SB 1318 takes these protections a step further by incorporating the following heightened requirements: Mandatory/Salary-Capped Buyout Options – Similar to physicians, mandatory buyout clauses must now be integrated into noncompete covenants with dentists, nurses and physician assistants. The amendments eliminate the statute’s open-ended “reasonable price” requirement and will now require buyout clauses to not exceed a covered individual’s “total annual salary and wages at the time of termination.” For many agreements, this will result in a significant reduction from previous buyout clauses. One-Year Duration – Noncompete covenants that are executed with physicians and other health care practitioners will be limited to one (1) year following the termination of the covered individual’s contract or employment. Five-Mile Radius – The geographic area of noncompete covenants that are executed with physicians and other health care practitioners will now be limited to “a five-mile radius from the location at which the health care practitioner primarily practiced before the contract or employment terminated.” Termination Without “Good Cause” for Physicians – The circumstances of a physician’s termination will impact the enforceability of their noncompete covenant. Noncompete covenants will be void and unenforceable against a physician if they are involuntarily terminated without “good cause,” which is defined as “a reasonable basis for discharge . . . that is directly related to the physician’s conduct, including the physician’s conduct on the job, job performance and contract or employment record.” Importantly, this distinction is limited to physicians. The enforceability of noncompete covenants that are executed with other health care providers will not be impacted by the circumstances of their termination. Clear and Conspicuous Language – Noncompete covenants that are executed with physicians and other health care practitioners must now “have terms and conditions clearly and conspicuously stated in writing.” SB 1318 does not expand further on this requirement, but it will result in noncompete covenants being susceptible to attack on this basis. Managerial/Administrative Carve-Out – Before the enactment of SB 1318, Texas’ heightened enforceability requirements extended to most physician-entered noncompete covenants “related to the practice of medicine” (excluding certain business ownership interests). This created some ambiguity regarding when these heightened requirements were triggered. SB 1318 partially resolves this by emphasizing “the practice of medicine does not include managing or directing medical services in an administrative capacity for a medical practice or other health care provider.” Stated differently, noncompete covenants that are executed with physicians employed solely in a managerial or administrative capacity will not be subject to these heighted requirements. When Do These Changes Go into Effect? The changes go into effect on September 1, 2025. Importantly, these changes are prospective in nature and only apply to noncompete covenants that are entered into or renewed on or after this date—meaning that preexisting noncompete covenants will continue to be governed by Texas’ noncompete laws existing before the effective date of SB 1318. What’s Next? These amendments are consistent with the nationwide trend towards more restrictions on the permissive use of noncompete covenants. While these amendments are not retroactive, it is conceivable that judges may still take these amendments into consideration when analyzing the enforceability of preexisting covenants in future litigation under Texas’ current “no greater than necessary” standard. In turn, employers will need to weigh whether they make these changes on a rolling basis or preemptively amend existing agreements and consider other avenues for protection. Polsinelli attorneys are available to assist covered health care entities in navigating these changes and ensuring that their protectable business interests are adequately safeguarded.

This past week, the FTC appealed a Texas federal court’s August ruling that blocked nationwide enforcement of the non-compete ban. The non-compete ban will remain blocked during the pendency of the appeal process. However, the outcome of the appeal will determine: (1) whether the non-compete ban remains blocked; and (2) the future scope of the FTC’s regulatory authority. There are three court challenges to the non-compete ban. The status of those challenges (including appeals) is detailed below: Ryan v. The Federal Trade Commission: On October 18, 2024, the FTC filed a Notice of Appeal to challenge a Texas federal court’s seminal ruling, which held the non-compete ban unlawful and blocked—nationwide—the FTC’s non-compete ban from taking effect on September 4, 2024. Pending the appeal, the non-compete ban remains enjoined. The rule will now be considered by the Fifth Circuit. It is likely the issue will be appealed to the U.S. Supreme Court for review. Properties of the Villages, Inc. v. Federal Trade Commission: In August 2024, a Florida federal court entered a limited injunction prohibiting enforcement of the non-compete ban against the named plaintiff. In late September 2024, the FTC filed a Notice of Appeal. The rule will now be considered by the Eleventh Circuit. If there is a circuit split in the U.S. Courts of Appeals, that could create uncertainty in the business community. A circuit split on an issue of national importance, such as this, would also increase the high probability that the U.S. Supreme Court would entertain an appeal and weigh in itself. ATS Tree Services, LLC v. Federal Trade Commission: As the appeals of the Ryan and Villages cases progress, one challenge to the non-compete ban will not be moving forward. In July 2024, a Pennsylvania federal court upheld the legality of the FTC’s non-compete ban. Following that ruling, the Court refused to issue a stay pending the appeal in Villages and the then-anticipated Ryan appeal, prompting the plaintiff to abandon its challenge to the non-compete ban and dismiss the case. Evaluating the potential impact of FTC leadership change: Another consideration for the non-compete ban’s legal battle is the fate of FTC Chair Lina Khan’s tenure. Her three-year term expired in late September, but she may remain on the job as acting chair until or if she’s replaced. Depending on the outcome of the Presidential and Congressional elections, the FTC could come under new leadership at which time the non-compete ban could be rescinded and/or the appeals dropped. What comes next? As the appeal process unfolds, the non-compete ban remains blocked vis-à-vis the Ryan court’s ruling. Polsinelli attorneys will continue to monitor the status of the appeals.

Yesterday, Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas in Ryan v. The Federal Trade Commission upheld a challenge by business groups to the FTC’s non-compete ban. In addition to confirming her earlier ruling that the FTC non-compete ban was not a valid exercise of agency power, the judge also expanded the limited, temporary injunction entered on July 3, 2024 to hold unlawful and set aside the noncompete-ban in a ruling with a “nationwide effect” that is not limited to the parties in the lawsuit. In other words, the FTC’s non-compete ban will not take effect on September 4 for anyone. The Court concluded that: (1) the FTC lacked statutory authority to promulgate substantive rules concerning unfair methods of competition, i.e. the non-compete ban; and (2) the non-compete ban is arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” As a result, the Court found the non-compete ban to be an unlawful agency action. In deciding the appropriate relief, the Court relied on recent precedent from the Fifth Circuit to conclude its ruling must have a “‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’” Thus, the Court’s ruling prevents (1) the FTC from taking any action to enforce the non-compete ban against anyone; and (2) the FTC non-compete ban from taking effect on September 4, 2024—effectively vacating it. What happens next? In the wake of the ruling, the FTC’s spokesperson stated, “[The FTC is] seriously considering a potential appeal.” If the FTC decides to appeal, the decision would be reviewed by the U.S. Court of Appeals for the Fifth Circuit in New Orleans. Any decision rendered by the Fifth Circuit would likely be appealed to the U.S. Supreme Court—meaning the final fate of the FTC’s non-compete will be revisited and could change. Importantly, even though the FTC non-compete ban will likely not go into effect in the immediate future, the FTC still has the power in the interim under Section 5 of the FTC Act to pursue enforcement actions on a case-by-case basis. In reacting to the ruling, an FTC spokesperson stated, “Today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.” If the FTC is to be taken at its word, it appears ready to amplify such enforcement actions in the future. The FTC’s posture could change after the November election depending upon the policies of the next administration. How should employers approach non-competes? Notwithstanding yesterday’s ruling, employers should still be mindful of the enforceability of their non-competes now and in the future. Several states have limited or outright banned the use of non-competes. The move by the FTC could spark additional state legislatures to revisit state-level restrictions as they return from recess and begin new legislative sessions this Fall. The U.S. Congress could also decide to enact legislation of its own; and, it’s conceivable that yesterday’s ruling will serve as a catalyst for Congress to revisit such legislation. Polsinelli attorneys are continually monitoring the evolving landscape of restrictive covenant law and are available to help you evaluate your use of non-competes and other restrictive covenants to protect competitive information.

Yesterday (July 23), a Pennsylvania judge—in ATS Tree Services, LLC v. Federal Trade Commission—upheld the legality of the FTC's non-compete ban. This ruling contradicts the ruling recently issued in a parallel proceeding in Texas. Earlier this month, a Texas judge—in Ryan, LLC v. Federal Trade Commission—temporarily enjoined the FTC’s non-compete ban from going into effect against the named plaintiff/intervenors. Although the Texas judge declined to implement a nationwide injunction, she signaled an intent to uphold the challenge to the non-compete ban in a future ruling based on her finding that the FTC had likely exceeded its statutory authority and a categorical ban on non-competes would be arbitrary and capricious.  The ruling sides with the FTC, creating a divide in the judiciary on the scope of the FTC's regulatory powers and the legality of the FTC’s upcoming non-compete ban (scheduled to take effect on September 4). While the Court’s ruling partially denied a preliminary injunction based on a finding of no irreparable harm, the crux of the opinion held that plaintiff was unlikely to succeed in establishing that the FTC’s non-compete ban is unlawful. In so finding, the judge endorsed the FTC’s interpretation of its procedural and substantive rulemaking authority and concluded that the FTC has the authority to promulgate a rule that effectively bans non-competes nationwide. What comes next? While the Pennsylvania judge's decision provides a lifeline to the quickly approaching non-compete ban, the FTC's win may be short-lived. By August 30, the Texas judge intends to rule on the ultimate merits of the challenge to the non-compete ban, at which time she could issue more expansive, nationwide relief. Additionally, briefing is underway in a third challenge to the non-compete ban filed in Florida (Villages, Inc. v. Federal Trade Commission). It is expected that yesterday’s developments could spur additional legal challenges by employers. We will continue to monitor and report new developments.   What should employers do now? Given the uncertainty of whether the FTC’s non-compete band will go into effect on September 4, employers should consult with counsel about their options and the appropriate steps and contingencies to explore in the interim.

On July 3, a Texas judge in the bellwether lawsuit, Ryan, LLC v. The Federal Trade Commission, became the first to weigh in on the legality of the FTC’s non-compete ban that is set to take effect on September 4. As was widely anticipated, the Court concluded that a preliminary injunction was appropriate, and it temporarily enjoined the non-compete ban from going into effect against the named plaintiff/intervenors to the Ryan lawsuit. Less anticipated, the Court declined to issue a nationwide injunction to non-parties—meaning that the FTC’s non-compete ban currently remains set to take effect on September 4 for all employers who are not named parties in the Ryan lawsuit. In reaching its conclusion, the Court held that the FTC’s rule banning most non-competes is likely unlawful for two reasons: (1) the FTC likely exceeded its statutory authority because it does not have substantive rulemaking authority to craft rules regarding unfair methods of competition; and (2) a categorial ban on nearly all non-competes would likely be arbitrary and capricious because it is overly broad without any reasonable explanation. While these findings are a clear rebuke of the FTC’s actions, the Court expressed doubt about whether it would be appropriate for it to issue a nationwide injunction that would extend to non-parties because such relief is unnecessary to protect the interests of the named parties (which is the focus at the preliminary injunction stage). The implications of this ruling are going to evolve over the next two months. The Court has ordered the parties to submit a joint status report by July 9 to determine the case’s next steps, and it has committed to issuing a final decision on the merits of the entire lawsuit by August 30. This forthcoming merits-based decision could result in a more expansive nationwide injunction that would extend to non-parties; however, many employers may view this as providing little reprieve in the interim because of the anticipated rulings timing with the looming September 4 effective date and actions needed to prepare for that effective date. For now, employers will need to revisit how they intend to approach the FTC’s Final Rule in the days leading up to September 4. Attention will also likely shift to the parallel lawsuit in Pennsylvania, ATS Tree Services, LLC v. The Federal Trade Commission, which leaves open the possibility of a nationwide injunction still being issued by that Court later this month.

Yesterday (May 29), in Ryan, LLC et al. v. The Federal Trade Commission, the FTC filed its response in opposition to Plaintiffs’ request to stay/enjoin the FTC Rule banning non-competes from taking effect on September 4. The Court has committed to issuing a decision on Plaintiffs’ request no later than July 3. Consistent with commentary to the Rule, the main thrust of the FTC’s response argues it has authority to issue the Rule pursuant to the Federal Trade Commission Act’s directive that Congress “empowered and directed” the FTC to prevent the use of unfair methods of competition through rulemaking. The FTC also devotes significant briefing to dispelling the application of the “major questions doctrine” to curtail its regulatory ability. We anticipate the Court’s decision will most likely hinge on whether the Court applies the major questions doctrine – articulated in the U.S. Supreme Court’s 2022 decision in West Virginia v. Environmental Protection Agency – to grant a nationwide injunction enjoining the Rule. In the West Virginia decision, the Supreme Court found the EPA’s policy involved a “major question” and that the agency went too far in its attempt to regulate absent explicit permission from Congress to do so. The U.S. Court of Appeals for the Fifth Circuit employed that same rationale to affirm a preliminary injunction blocking enforcement of President Biden’s COVID-19 federal contractor vaccine mandate. The Fifth Circuit’s decision likely drove the filing of the two lawsuits challenging the Rule in Texas federal courts, which sit in the Fifth Circuit. Plaintiffs' reply briefs are due June 12. Your Polsinelli Restrictive Covenant and Trade Secret Group will continue to monitor these cases and will keep you updated with any major litigation developments.

On April 23, 2024, the Federal Trade Commission (“FTC”) conducted a special Open Commission Meeting to vote on a Final Rule (the “Rule”) banning most non-compete clauses as an “unfair method of competition.” By a vote of 3-2, the Rule was approved for publication in the Federal Register. The Rule becomes effective 120 Days from Publication in the Federal Register (the “Effective Date”). Here is what you need to know: What clauses are impacted by the Rule? The Rule defines a prohibited “non-compete clause” to include any contract term, workplace policy, or term or condition of employment, written or oral, that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking work, accepting work, or operating a business after prior employment ends. Other types of post-employment covenants (e.g., non-solicitation) could be attacked under the Rule if they have the effect of a non-compete. What employers and workers are impacted by the Rule? Generally, the Rule will impact all employers other than certain banks, savings and loan companies, non-profits, and common carriers, which are not subject to the FTC’s authority by law. The Rule applies to paid and unpaid workers, including employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors. The Rule does not apply to the franchisee in a franchisor relationship. What conduct is prohibited by the Rule? The Rule prohibits employers from (1) entering into or attempting to enter into a non-compete clause, (2) enforcing or attempting to enforce a non-compete clause, and (3) representing that a worker is subject to a non-compete clause. The Rule applies to non-compete clauses entered before the Effective Date unless the non-compete clause is with a “Senior Executive”. The exception for “Senior Executives”: Unlike the proposed rule, the final version of the Rule provides an exception for non-compete clauses entered into with Senior Executives before the Effective Date. A Senior Executive means a worker receiving total annual compensation (excluding fringe benefits) of at least $151,164 in the preceding year, and was “in a policy-making position”—meaning the entity’s president, CEO, officer, or other person who has final authority to make policy decisions that control significant aspects of the entity (and not just a subsidiary or affiliate). The exception for “bona fide sales of business”: The Rule does not apply to non-compete clauses entered into “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” The Rule does not limit this exception to only those holding at least 25% ownership interest in a business, like the proposed rule did. What does the Rule require employers to do now? On or before the Effective Date (unless the Rule is enjoined), employers are required to provide all workers with impacted non-compete clauses clear and conspicuous notice to the worker that the non-compete clause will not be, and cannot be, legally enforced against the worker. The notice must be provided in writing by hand deliver, mail, email or text message, and group communications are permissible. The Rule provides model notice language. What happens to existing lawsuits? The Rule does not apply to causes of action related to non-compete clauses that have accrued prior to the Effective Date. Put another way, the Rule likely will not change cases involving alleged violations of non-compete clauses occurring before the Effective Date. What do we expect next? Lawsuits challenging the Rule were filed within hours of the vote, including a lawsuit filed in the United States District Court for the Eastern District of Texas by the U.S. Chamber of Commerce. Given the scope of the Rule and its impact, it is anticipated that at least some courts will enjoin the Rule from taking effect until the U.S. Supreme Court has an opportunity to weigh in on the Rule’s validity and constitutionality. Is there still risk when hiring a competitor’s employees? Yes. The Rule does not take effect for months and may never take effect if the court challenges are successful. The Rule also does not apply to conduct occurring before the Effective Date, so actions taken now still have risk. More importantly, the Rule generally does not eliminate all risk to hiring employees from a competitor because even without non-compete clauses, employers can bring suit based on other contract terms (non-solicitation and non-disclosure clauses), trade secrets, and legal theories to protect their interests when former employees go to work for a competitors. Contact your Polsinelli attorney if you need guidance reviewing your non-compete agreements or strategy around restrictive covenants.

FTC Final Rules Banning Non-Competes Vote Next Tuesday As you know, last year, the FTC issued a proposed rule banning virtually all non-compete agreements (which does not include non-solicitation agreements, confidentiality agreements and the like). Yesterday, the FTC announced that a special Open Commission Meeting will be held virtually on Tuesday, April 23, 2024, at 2 p.m. EDT at which time the FTC is expected to vote on a Final Rule. Here is what you need to know for now: When is the vote on the Final Rule to ban non-competes? Tuesday, April 23, 2024 at 2 p.m. EDT. The Open Commission Meeting will be available to view here.  What is expected to happen? The consensus among Polsinelli’s Restrictive Covenant and Trade Secret Practice Group, other experts, and scholars is that the FTC will vote to implement a Final Rule substantially similar to the Proposed Rule. In short, that means that it will vote to ban essentially all non-competes with limited exceptions (some form of ownership in the entity being sold – the Proposed Rule had a 25% threshold). When will the Final Rule be effective? The Final Rule is expected to become effective 60 days after publication in the Federal Register. (The FTC has the ability to implement the Final Rule sooner if necessary due to an “emergency situation” but we do not anticipate that in this instance.) What can you do now? Understand that the vote will be Tuesday; that does not mean the Rule will be effective Tuesday. Understand that the Rule likely will not be effective until 60 days after publication in the Federal Register and that we anticipate that there will be litigation seeking to block the Rule from going into effect, as discussed below. Evaluate your use of non-competes, and develop strategies for navigating the uncertainties of the time. Strategically and thoroughly analyze your trade secret protocols and protections. What do we expect next? Experts and scholars (and we) fully expect the Final Rule will be challenged in Federal Court with the challenging parties seeking immediate injunctive relief preventing implementation of the Final Rule, based upon the FTC exceeding its authority. Contact your Polsinelli attorney if you need guidance reviewing your non-compete agreements or strategy around restrictive covenants.

As we reported last month, effective January 1, 2024, non-compete agreements in California are unenforceable regardless of where the contract is signed. This means employees who sign non-competes outside California, then move to California and seek new employment in violation of the non-compete, can rely on California law to invalidate the non-compete. Practically speaking, this creates unpredictable challenges for employers with mobile or largely remote workforces. More importantly, AB 1076 makes it unlawful for employers to include a non-compete clause in an employment contract or require an employee to enter a non-compete. Any employer who uses, or attempts to use, a non-compete with employees working in California can now be sued by those employees, and the law entitles the employee to an injunction, damages, and attorneys’ fees in the lawsuit. In addition, by February 14 – next week – employers must provide notice to any current or former employee employed after January 1, 2022, that their non-compete clause or non-compete agreement is void. This notice must be individualized and, in writing, sent to the employee’s last known mailing and email address. Employers who fail to provide the required notice on time may be assessed a civil penalty of up to $2,500 per violation. Members of Polsinelli’s Restrictive Covenant and Trade Secret Practice Group are available to assist employers in mitigating the risks of using non-competes and other restrictive covenants with employees.

On January 9, 2024, Shareholders in our Restrictive Covenant and Trade Secret Practice Group conducted a webinar covering “What Employers Need to Know About Non-Competes in 2024.” A recording of that webinar is available here. Below, the Team addresses some of the additional questions concerning the status of the FTC Proposed Rule, anticipated challenges to the Proposed Rule, FTC Lawsuits Against Employers for Imposing Non-Competes, Exceptions to Non-Compete Bans, Employee “Theft,” and Hiring Employees Subject to Non-Competes that were posed during the webinar. 1. The Status of the FTC Proposed Rule Banning Non-Competes The comment period ended on April 19, 2023, and we are now waiting on the FTC to issue a Final Rule. There is no deadline for the FTC to issue a Final Rule, though the general consensus is that the FTC will issue a Final Rule in April 2024. No one knows with certainty what the Final Rule will say, and the FTC is not restricted by the proposed rule or comments. It can adopt the proposed rule as is, modify, or even implement an entirely different rule without any additional rulemaking process. The FTC’s advocacy for a full ban since the comment period closed suggests it does not intend to change course, and employers would be wise to prepare for a Final Rule substantially similar to the proposed one. 2. Anticipated Challenges to the FTC Final Rule Regardless of what the Final Rule looks like, it will be immediately challenged in court (similar to the vaccine mandate challenges), with the Final Rule taking effect unless and until it is enjoined. The prevailing opinion is that there are very strong arguments to attack the FTC’s authority to issue the rule, primarily that the FTC exceeded its rule-making authority. Regardless of the ultimate success of the legal challenges, it will still generate uncertainty in the interim and give rise to public policy arguments against enforcement in current disputes (which some judges may find persuasive). Moreover, the rulemaking effort is merely another example of growing hostility towards non-compete covenants, and we will likely see Congress and states, including New York, revisit this issue. 3. FTC Lawsuits Against Employers for Imposing Non-Competes During 2023, even without the authority of a Final Rule, the FTC filed three complaints against employers over their use of non-competes. The claims alleged the employers imposed non-competes on employees in an unfair manner that tended to harm competition, consumers, and workers, thus violating antitrust laws. The Complaints were unrelated to any enforcement efforts by the employers at issue, but the FTC argued that the noncompetition agreements at issue had the effect of prohibiting workers in the affected industries from earning higher wages and were therefore unfair labor practices. This ties into the cooperation agreements entered into between the FTC, the NLRA and DOL in 2023, which make it more likely that employers’ non-competes may come under scrutiny as a result of an unrelated audit or investigation. 4. Exceptions to Non-Compete Bans in the Proposed Final Rule The FTC Proposed Rule is very broad and applies to all kinds of paid and unpaid workers, while some state laws are more narrow (bans for employees only) or are less clear in whether they are intended to apply to other categories of workers beyond employees. Similarly, the FTC Proposed Rule did not contain a carve out for highly compensated workers. Other state laws, like Illinois, Colorado, Maryland, Maine, Nevada, Oregon, Rhode Island, Virginia, Washington and Washington D.C., allow for non-competes if an employee makes above a certain salary threshold. It is best practice to evaluate each case based on its facts and review the applicable law, since there is no one-size-fits-all approach to non-compete guidance at this time. 5. Employee “Theft” Most of the laws voiding non-competes do not impact the enforceability of non-solicitation clauses, though some do (e.g., Colorado and Illinois). However, with the federal government’s recent focus on antitrust, non-solicitation clauses purporting to prohibit the hiring of employees by a competitor or business partner may come under closer scrutiny. Employers should be wary of any agreement that could be interpreted as restricting the ability to hire employees. 6. Hiring Employees Subject to Non-Competes Even with the changes in the law, hiring employees subject to non-competes can still be risky. Generally, non-competes are not per se invalid, and lawsuits to enforce non-competes can be made even if the covenant in question is likely to ultimately be found overbroad or unenforceable. Unfortunately, the path to proving a non-compete is unenforceable in court, and arbitration is disruptive, time-consuming and expensive. Polsinelli attorneys are available to help you evaluate the facts of each particular situation on a case-by-case basis to develop a risk management strategy for hiring and retaining employees.

On December 22, 2023, New York Governor Kathy Hochul declined to sign legislation (S3100) that would have outlawed noncompete clauses in virtually all employment contracts. If it had gone into effect, New York would have been the fifth state to ban non-competes outright, joining California, North Dakota, Oklahoma, and, most recently, Minnesota. In vetoing the bill, however, Governor Hochul did not forgo the possibility of a future ban. Rather, she expressed concern with the current bill’s “one-size-fits-all” approach – particularly considering the varying industries that call New York home, and their interests and needs to retain high-paid workers. These comments and discussions between the Governor and the New York State Senate appear to signal that it is possible that a noncompete ban may still be possible in the near future – if a salary threshold can be met. Prior to the veto, the Governor and the Senate had discussed exempting workers earning more than $300,000 per year. New York business leaders gave feedback that even a lower threshold of $250,000 could be a workable number. Another issue not addressed by the most recent proposed legislation is the exemption of noncompete provisions between buyers and sellers in the sales of businesses. Many other states with such bans or restrictions on noncompete agreements have such a carve-out. While the recent veto is a victory for New York employers, the reality is that noncompete provisions are still heavily under attack. Employers should carefully evaluate their policies and practices that protect their confidential information, trade secrets, and other valuable business interests to ensure that even if noncompete agreements are one day banned, they are adequately protected. Contact your Polsinelli attorney if you have any questions or need assistance regarding this or other restrictive covenant issues.

The General Counsel of the National Labor Relations Board (“NLRB”) set her sights on a new target with the latest memorandum: non-competition agreements. The memorandum, while not binding, lays out the General Counsel’s belief that the proffer, maintenance, and enforcement of agreements containing provisions prohibiting employees from competing with their former employer are unlawful because they have a tendency to chill employees’ rights under Section 7 of the National Labor Relations Act, which protects employees’ right to organize. Indeed, General Counsel Abruzzo states that “retaining employees or protecting special investments in training employees are unlikely to ever justify an overbroad non-compete provision.” Specifically, General Counsel Abruzzo provides that a non-compete provision in an employment or severance agreement is unlawful “when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.” These provisions, General Counsel Abruzzo believes, interfere with employees’ ability to: Concertedly threaten to resign to secure better working conditions; Carry out concerted threats to resign or otherwise concertedly resign to secure improved working conditions; Concertedly seek or accept employment with a local competitor to obtain better working conditions; Solicit their co-workers to go work for a local competitor as part of a broader course of protected concerted activity; Seek employment, at least in part, to specifically engage in protected activity, including union organizing, with other workers at an employer’s workplace. The memorandum notes that non-compete provisions that only restrict an individual’s managerial or ownership interest in a competitor could be lawful. Furthermore, it is important to note while the National Labor Relations Act applies to all workforces, including non-union workforces, it does not apply to statutory supervisors or managers. Consult your Polsinelli attorney for assistance evaluating your non-competes against this new guidance as well as other recent developments such as the Federal Trade Commission’s pending proposal addressing non-competes.

Non-compete agreements have had a rough 2023, most recently with President Biden specifically calling them out on Tuesday evening during his State of the Union and emphasizing his Administration’s opposition to them.  This, of course, is on the heels of the FTC’s recently announced proposed rule banning most non-compete agreements, as we recently reported. Congress now is also getting in on the action to ban non-compete agreements. Last week, a bi-partisan group of legislators reintroduced the Workforce Mobility Act (the “Act”) which seeks to ban non-compete agreements with limited exceptions. The Act is similar to the FTC’s proposed rule but does have key differences. The Act, which refers to non-compete agreements as “blunt instruments that crudely protect employer’s interests”, defines a non-compete agreement as: an agreement, entered into after the date of enactment of this Act between a person and an individual performing work for the person that restricts such individual, after the working relationship between the person and individual terminates, from performing— (A) any work for another person for a specified period of time; (B) any work in a specified geographical area; or (C) any work for another person that is similar to such individual’s work for the person that is a party to such agreement. Any agreements that meet the above definition will have “no force or effect” except for specific instances involving (1) the sale of goodwill or ownership interests in a business, including certain severance agreements for Senior Executives, or (2) partnership dissolutions or disassociations. Otherwise, any non-compete agreements will be unenforceable—and even expose employers to potential liability for attempting to enter into any such agreements. Other key takeaways from the proposed Act include: Under its language, the Act should only apply prospectively. As such, non-compete agreements already entered into could survive potential enactment of the Act. If the Act becomes law and the FTC’s proposed rule is implemented, there will be a conflict concerning the enforceability of existing non-competes – under the FTC’s proposed rule, existing non-competes would need to be rescinded within 180 days after publication of the final rule. An additional conflict between the Act and the FTC’s proposed rule concerns enforceability of non-competes for Senior Executives and high earners. While the Act would exempt Senior Executives who sign particular severance agreements, the FTC’s proposed rule does not contain that exemption. The Act would not ban non-solicitation agreements and even promotes the use of non-disclosure agreements covering trade secrets as reasonable alternatives to protect competitive information. The Act would require the Federal Trade Commission (“FTC”) and Department of Labor (“DOL”) to assist with enforcement of the Act which would be tricky if the FTC’s proposed rule is implemented, as it differs in ways from the proposed Act. The Act would allow for a private right of action for “an individual who is aggrieved by a violation.” If successful, such individual would be entitled to actual damages and reasonable costs and attorney fees. The reintroduction of the Workforce Mobility Act, and the national trend against non-compete agreements reinforces the need for employers to safeguard their competitive information with other measures. Just last month we provided guidance on best practices that can be implemented by employers to ensure their information is protected. We will continue to follow developments surrounding the proposed legislation and are prepared to assist employers with questions surrounding immediate actions that can be taken to respond to possible bans on non-competes.

As we recently reported, on January 5, 2023, the Federal Trade Commission proposed a rule banning the use of non-compete covenants in nearly all circumstances. The FTC is seeking comments on the proposed rule until March 20, 2023. Even if the proposed rule or a variation of it is ultimately implemented, it will likely face a multitude of legal challenges. To learn more about this proposed rule, please see our recent webinar recording here. Note: Guests will have to register, then can click on the View Content link. A new browser window will pop up with the recording. Nevertheless, in the immediate aftermath of this proposed rule, employers are asking, “what now?” In recent years, we forewarned of the impending threat to the use of non-compete covenants and emphasized the need for employers to protect their confidential information through other means. Regardless of the outcome of the proposed rule, the FTC’s action is a reminder that non-compete covenants are under ever increasing scrutiny and criticism, and employers must consider alternative ways to protect their confidential and trade secret information. Over a year and a half ago, we encouraged employers “to revisit the protections they have in place to protect trade secret and confidential information and their investments in employee training.” Especially in light of the FTC’s announcement, we reiterate that employers would be wise to revisit those protections and engage in a thorough three-step process to evaluate, identify and protect their confidential and competitive information. The steps include: 1. Conducting a comprehensive review and identification of the company’s competitive, confidential and trade secret information; 2. Identifying who has access to that information; and 3. Evaluating how to best protect that information (potentially without the use of non-competes). While this auditing process takes time and energy and is not a one size fits all solution, it is an investment in the protection of competitive information that will pay dividends if the need to protect that information through litigation ever arises. Generally, some of the safeguards the employer can use to protect this information include: Ensuring access to shared files is on a need-to-access basis only; Limiting access to client information to only those clients whom a particular employee services; Limiting access to research and development information to only those individuals in research and development who are working on the particular project; Republishing policies forbidding the use of personal email accounts for business purposes; Implementing safeguards for the electronic mailing and sharing of confidential documents; Having employees acknowledge/reaffirm their understanding that company competitive information is owned by the company and only certain people are allowed access; Utilizing non-solicitation covenants in appropriate circumstances. Identifying and ensuring adequate protection for competitive information is paramount, given the ongoing threats to the viability of non-compete agreements – both at the state and federal levels. Polsinelli attorneys can assist employers with the evaluation, identification and protection process described above by following our “TS 360” program. We also will continue to follow developments surrounding the proposed rule and are prepared to assist employers with questions surrounding immediate actions that can be taken to respond to the possible ban on non-competes.

To ring in the 2023 new year, the Federal Trade Commission (“FTC”) has taken multiple actions targeting the use of non-compete agreements, all of which are consistent with President Biden’s July 2021 Executive Order on competition in the labor market. The FTC has proposed both a rule banning the use of non-compete agreements with employees and independent contractors, and it also took legal action under its existing authority against three companies for their use of non-competes. The FTC’s proposed rule would ban employers from entering into, maintaining, or enforcing non-compete clauses with their workers, including employees, independent contractors and unpaid workers. The FTC’s notice does not mince words about its effect, as the agency states its intention to “categorically ban employers from using non-compete clauses.” The rule defines a non-compete clause as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Though the rule does not target non-solicitation or non-disclosure clauses, it proposes a functional test to determine whether a clause meets the definition, meaning that a non-disclosure or non-solicitation covenant that effectively bars an employee from seeking employment in their chosen industry could be considered a non-compete. Non-compete clauses that require the employee to pay liquidated damages to the employer in the event of competition are also prohibited. The rule would apply retroactively and require employers to rescind any existing non-compete contracts within 180 days after publication of the final rule. Employers would also be required to provide individualized notice to the employees within 45 days of rescinding the non-compete clause. Importantly, the rule would not apply in the context of a sale of a business or ownership interest of at least 25%. The FTC also brought an enforcement action against three different companies to invalidate their respective worker non-compete agreements pursuant to its broad authority under Section 5 of the FTC Act. In the respective legal actions, the FTC ordered the companies to cease enforcing their agreements and to notify all employees they were no longer bound by the agreements. This comes on the heels of the FTC’s major policy announcement that the agency would vigorously enforce Section 5’s prohibition on unfair methods of competition and that this enforcement effort would cover areas that may otherwise not be within the purview of other antitrust laws, such as the Sherman and Clayton Acts. If ultimately published as a final rule, employers can anticipate the non-compete ban will face immediate legal challenge on numerous grounds, as noted in FTC Commissioner Wilson’s lone dissent to the proposed rule. Given the importance of non-compete agreements to many employers’ efforts to protect their competitive information and relationships, employers should carefully monitor these developments. Now is the time to re-evaluate strategies for protecting competitive information by focusing on other avenues available by contract or under law that do not rely on non-competes. This includes careful examination and identification of protectable information (trade secrets), the measures in place to keep such information secret, and employees’ access to such information. Employers can contact their Polsinelli attorneys to assist with drafting comments to the proposed rule and guidance on auditing and re-tooling these strategies in the wake of these FTC developments.

The District of Columbia Council passed the Non-Compete Clarification Act of 2022 (“Act”) in late July 2022, setting standards for how and when employers can use and enforce covenants not to compete. The Act notably clarifies and narrows the scope of D.C.’s Ban on Non-Compete Amendments Act passed in 2020, which (as its title suggests) banned the use of new non-compete agreements for all but certain medical employees. The new, clarified Act now allows the use of non-compete agreements for “highly compensated employees,” set at $150,000 per year in total compensation, as well as certain medical employees, and implements new substantive and procedural requirements for non-compete agreements. Employers May Use Non-Competes for Highly-Compensated Employees The biggest change implemented by the Act is restoring the ability of employers outside of the medical field to use non-compete agreements.  Employers may now enter and enforce non-compete agreements with “highly compensated employees” making over $150,000 in total compensation.  Employers can use a wide variety of forms of compensation to meet the threshold, including hourly or salary wages, bonuses, commissions, overtime, and vested equity, but may not include non-cash fringe benefits.  The Act continues to prohibit non-compete agreements for employees who do not meet this threshold.  However, the Act also scales back its application to employees who do not work primarily in D.C.  Whereas the original non-compete ban arguably applied to any employee who worked in D.C. for any period of time at all, the Act clarifies that the non-compete ban now applies only to employees who spend 50% or more of their time working in D.C. or who spend a “substantial” amount of work time in D.C. and do not spend more than 50% of their work time in another jurisdiction. The Act retains and modifies the prior non-compete ban’s exception for “medical specialists.”  Employers may permissibly enter a non-compete agreement with these employees if the employee is licensed to practice medicine, acts as a physician, has completed medical residency, and receives $250,000 or more in total compensation. Certain Agreements Not Subject to the Non-Compete Ban The Act excludes several types of agreements from its prohibition on non-competes for employees making less than the $150,000 threshold.  First, non-competes remain enforceable in connection with the sale of a business.  Second, the Act makes clear that non-disclosure agreements are not subject to the ban.  Finally, the Act contains an interesting, though somewhat ambiguous, exclusion for agreements providing a “long term incentive,” defined as bonuses or equity-type compensation “for individual or corporate achievements typically earned over more than one year.” Unfortunately, the Act does not clarify the prior non-compete ban’s ambiguity with respect to customer and employee non-solicitation agreements.  Although these agreements impose more limited restrictions on the employee’s activity and do not in most cases prohibit the employee from working in a particular field like a non-compete does, other states that have limited or prohibited non-compete agreements have taken varying and inconsistent positions on whether those limitations also apply to non-solicitation agreements.  Employers using non-solicitation agreements in D.C. should take care in structuring those clauses to avoid arguments that the non-solicitation acts in effect as a non-compete. Requirements for Non-Competes The Act imposes new substantive and procedural requirements that an employer must meet to enforce a non-compete against a highly-compensated employee: The agreement must specify the scope and nature of the non-compete (e.g. services, roles, competitive entities covered); The agreement must specific the geographic scope of the non-compete restriction; The duration of the non-compete may be for a maximum of one year for non-medical specialists or two years for medical specialists; The employer must provide the non-compete agreement 14 days in advance of the employee’s start date or the date the employee is required to sign the agreement. Employers Permitted to Limit Outside Employment The Act also restores D.C. employers’ ability to use “moonlighting” policies that limit or prohibit employees from working with other employers.  Previously, D.C.’s non-compete ban prohibited these policies, such that an employee could even work for a competitor during employment.  Now, employers may restrict employees from accepting outside employment when the employer reasonably believes working for a second employer will: Cause the employee to disclose confidential and/or proprietary information; Conflict with industry-specific or professional rules regarding conflicts of interest; or Impair the employer’s ability to comply with a contract, grant, or any law or regulation. New Notice Requirements The Act includes new notice requirements to employees. First, when an employer has a policy that includes one of the exclusions to the definition of “non-compete provision” (e.g. a policy limiting outside employment) the employer must provide such policy (1) within 30 days after October 1, 2022, (2) within 30 days of an employee’s first day of employment, and (3) after the employer makes a change to such policy. Additionally, employers must include a notice when presenting a highly compensated employee with a non-compete provision. D.C. employers should carefully review the Act and update their employment agreements to ensure that they continue to have the benefit of non-compete protection after the Act becomes effective in October 2022.

The Department of Justice (DOJ) and federal government continue to aggressively pursue antitrust violations and promote the federal government’s interest in heavily limiting the use of non-competition agreements.  While the DOJ has recently been unsuccessful in its target of “no poach” and “no hire” agreements and wage-fixing issues in antitrust trials, employers should not interpret this as a sign the government will back off its efforts to limit the use of non-competition agreements by employers across all industries. With the DOJ taking a more active role in prosecuting antitrust matters, there is a real risk antitrust claims will increasingly gain traction in restrictive covenant litigation.  In fact, the DOJ recently filed a Statement of Interest in a Nevada state court case regarding the enforceability of post-employment restrictive covenants of anesthesiologists.  The DOJ encouraged the state court to consider antitrust principles when evaluating the restrictive covenants, and further asserted its position that post-employment restrictive covenants may constitute impermissible restraints of trade under the Sherman Act, while providing a roadmap for the court to declare the agreements unenforceable on this basis. While the validity of non-competition agreements currently remains controlled by state law, the federal government’s attention to such agreements may ultimately limit the use of such agreements to situations where the agreement is truly necessary to protect a well-defined category of trade secrets.  Employers should keep this in mind when preparing new agreements and take the time to carefully evaluate existing non-compete agreements and hiring practices to determine any potential issues.  And, for employers who have or are contemplating “no hire” agreements with competitors, it is wise to consider how these may be scrutinized if challenged. Polsinelli attorneys continue to monitor actions taken by the federal government involving non-competition agreements and are prepared to assist employers with navigating this everchanging landscape.

On January 1, 2022, Public Act 102-0358, an amendment to the Illinois Freedom to Work Act will take effect and impact all non-compete agreements entered into prospectively. The law will ban employers from using non-compete agreements with employees earning less than $75,000 and from using non-solicitation agreements with employees earning less than $45,000. The law will not affect non-disclosure agreements entered with employees, regardless of income level. The law also requires an employer to provide a 14-day period to consider a non-compete or non-solicitation agreement and to advise the employee to consult with an attorney before entering into such an agreement. Illinois’ new law continues a recent trend limiting the scope of restrictive covenants, including, for example, at the federal level and in the District of Columbia. Employers should consult their Polsinelli attorney for assistance in reviewing and updating their template restrictive covenant agreements to ensure that after January 1, 2022 they enter enforceable agreements.

On July 9, 2021, President Biden made good on a campaign promise to address non-compete agreements by issuing a sweeping executive order that specifically targets barriers to competition. Specifically, the executive order encourages the Federal Trade Commission and other federal agencies to ban or limit non-compete agreements. However, no specifics are offered as to the breadth of any restrictions the Biden Administration would ultimately like to see. And even assuming those agencies respond to this encouragement, we expect the rulemaking process will not yield actionable results for a considerable period of time and is unlikely to result in a complete ban on the use of non-competes. In a press conference, the President stated that the executive order is in response to the growing number of employers utilizing non-competes in recent years – estimating that between 35 million and 60 million private-sector individuals are subject to non-competition agreements. The Biden Administration believes limiting or banning the use of non-competition agreements will increase economic growth and increase wages to allow workers mobility to switch to better-paying jobs. The executive order could prove to be an accelerant for states to initiate their own legislation limiting the use of non-competes – a recent state-law trend that has been gaining traction across the country, in which we have been closely monitoring over the last few years. Regardless of how broadly the executive order is written or when federal agencies ultimately issue new rules, the writing on the wall for years has indicated that the broad use of traditional non-compete agreements will continue to be limited. Employers would be wise to revisit the protections they have in place to protect trade secret and confidential information and their investments in employee training to ensure such protections are narrowly tailored to obtain court enforcement if challenged. One solution has been to move away from traditional non-compete agreements toward customer-based restrictions for the majority of employees. Polsinelli attorneys continue to monitor actions taken by federal agencies to enforce President Biden’s executive order and are prepared to assist employers with navigating the evolving non-compete landscape.

On December 15, 2020, the District of Columbia Council unanimously passed the Ban on Non-Compete Agreements Amendment Act of 2020, under which the District of Columbia joins California and a small handful of jurisdictions across the country that have prohibited the enforcement of covenants not to compete. The new law began as an effort to limit the enforcement of non-compete agreements against low wage employees, but on December 1, 2020 was amended to prohibit non-competes against all virtually all employees who perform work in D.C.  The primary exception to the prohibition is for “medical specialists,” defined as licensed physicians who have completed a medical residency and are paid at least $250,000 per year.  Non-compete agreements may continue to be enforced against medical specialists, so long as certain procedural requirements are followed prior to the agreement’s execution.  In addition, non-compete agreements entered by the sellers of a business in connection with the business’ sale remain enforceable.  Importantly, however, the new law also prohibits employer policies that forbid employees from working for competitors during the employment relationship. Although non-compete agreements are prohibited, confidentiality or non-disclosure agreements protecting confidential and proprietary information and trade secrets are still enforceable.  The new law is less clear, however, whether non-solicitation agreements that prohibit employees from working with the employer’s customers or recruiting its employees are enforceable.  Many employers use non-solicitation agreements to impose a more limited restriction that prevents a departing employee from abusing a customer relationship.  The language of the law does not appear to prohibit non-solicitation agreements, but, unlike similar non-compete prohibitions in other states, the law does not expressly preserve the enforceability of non-solicitation agreements. D.C. employers that rely on non-compete agreements should take the following steps: The new law’s prohibitions on the enforcement of non-compete agreements are not applicable to pre-existing agreements entered prior to the effective date of the law (which Polsinelli estimates will become effective in late February after congressional review).  Accordingly, employers that do not have covenants not to compete with their D.C. employees should consider now whether they wish to implement these agreements. Ensure on a going forward basis that employees entering positions that would typically be required to execute a non-compete are instead required to sign confidentiality and non-solicitation agreements instead. Hospital and other medical employers should update their onboarding processes for physicians to ensure that the physician is provided with any non-compete agreement and the other information required by the law sufficiently in advance to satisfy the new law’s requirements. Review existing “moonlighting” policies and, if necessary, modify them to comply with the new law. In addition to rendering non-competes void and unenforceable, the new law also provides employees with a private right of action to recover attorney’s fees and statutory remedies of $500 to $3,000 per violation in cases of prohibited agreements.  The D.C. government can also bring enforcement actions. Finally, the law also prohibits retaliation against employees who seek to exercise their rights under the act or oppose illegal agreements. Polsinelli attorneys are prepared to provide additional guidance to D.C. employers regarding these recent changes.

It seems everything in the world right now somehow revolves around COVID-19. Stay-at-home orders; the debate over students returning to the classroom; “essential” versus “non-essential” workers; college and professional sports; and the list goes on. In the legal world, one coming boom caused by the pandemic should not be overlooked: trade secret litigation. Consider how much of the workforce is working remotely. Recent statistics show that in the past few months alone, even after many businesses have begun reopening, 70% of the workforce reported working remotely at least one day a week, and 59% reported working remotely more than half of the week. Some businesses have planned for their workforce to work remotely through the end of year and beyond, even permanently. What does this mean in terms of trade secret protection for employers? Just think of all information that has been shared electronically as a result of the new “work from home” normal. How many shared drives have been accessed remotely? How many documents have been sent to and downloaded in home offices? How many employees have accessed their employer’s data using a shared home or personal device? And in some instances, the uncertainty caused during the initial days of the pandemic caused companies to roll out programs and grant access to their information under rushed conditions, with concerns for privacy taking a backseat to the urgency of ensuring continuity of operations using a remote workforce. As if that is not enough reason for concern regarding the protection of trade secrets, consider also how many remote workers had access to trade secrets but have since been laid off or furloughed? What precautions, if any, were taken to ensure trade secrets and confidential information were guarded from theft by these former and furloughed employees? If a laid off employee had access to their employer’s competitive information, what will prevent them from opening their own business and competing directly with their former employer, using its methods and client information? To the extent they have not already done so, employers should immediately: Ensure access to shared files is on a need-to-access basis only; Limit access to client information to only those clients whom a particular employee services; Limit access to research and development information to only those individuals in research and development who are working on the particular project; Republish policies forbidding use of personal email accounts for business purposes; Implement safeguards for the electronic mailing and sharing of confidential documents; Have employees acknowledge/reaffirm their understanding that company competitive information is owned by the company and only certain people are allowed access; Ensure computer systems are only accessed through private, reliable and secure WiFi networks. A trade secret litigation boom is coming – are you ready?

Is Virginia the new California?  That may be an exaggeration, but in April 2020 the Commonwealth took major steps away from its historically pro-employer climate to provide employees and independent contractors with new potential claims.  We previously reported about Virginia’s extension of employment protection to LGBTQ employees and creation of a new state-law employment discrimination cause of action.  Virginia employers should also be aware of new changes to the Commonwealth’s wage and hour laws. Minimum Wage Increase The Virginia General Assembly submitted legislation to Governor Ralph Northam to increase the minimum wage from $7.25 to $9.50 per hour effective January 1, 2021. Under the proposed legislation, the minimum wage in Virginia would continue to increase to $11.00 in 2022, $12.00 in 2023, $13.50 in 2025, and $15.00 in 2026. The bill requires the General Assembly to vote again by July 1, 2024 in order for the final two wage increases to become effective. Governor Northam did not sign the bill and suggested that the bill be amended to delay the first increase until May 1, 2021. On April 22, 2020, the Virginia Legislature agreed with Governor Northam's suggestion and decided to delay increases in the Commonwealth’s minimum wage amid the COVID-19 pandemic. The Senate vote resulted in a 20-20 tie broken by Lieutenant Governor Justin Fairfax in favor of the amendment. The House of Delegates voted 49-45 in favor of the amendment to delay the increase. In addition to an increase in minimum wage, the new legislation requires three government agencies to review the effects of a regional minimum wage increase. These agencies must consider the potential impact of regional increases on benefits, income inequality and the cost of living. After review, the agencies must prepare a joint report with findings and recommendations by December 1, 2023. Under the new law, employers may pay a “training wage” at 75 percent of the minimum wage for employees in on-the-job training programs lasting less than 90 days. Moreover, the law provides that the Virginia minimum wage applies to persons whose employment is covered by the Fair Labor Standards Act, persons employed in domestic service or in or about a private home, persons who normally work and are paid on the amount of work done, persons with intellectual or physical disabilities except those whose employment is covered by a special certificate issued by the U.S. Secretary of Labor, persons employed by an employer who does not employ four or more persons at any one time, and persons who are less than 18 years of age and who are under the jurisdiction of a juvenile and domestic relations district court. The Virginia minimum wage does not apply to individuals participating in the U.S. Department of State's au pair program, those employed as temporary foreign workers, or individuals employed by certain amusement or recreational establishments, organized camps, or religious or nonprofit educational conference centers. New Wage Payment Claim Virginia also imposed a new “wage theft” statute that provides employees with powerful statutory remedies for an employer’s non-payment of wages.  Under the new law, employees can bring a claim for the recovery of unpaid wages.  If the employee is successful in proving that he or she has not been paid all wages due, then the employee can recover prejudgment interest of 8% per year on the amount of the wages from the date they were due.  If the employee can show that the employer “knowingly” failed to pay wages due, then the employee can recover his or her reasonable attorney’s fees incurred in the action.  And, if there was no “bona fide dispute” regarding the employee’s entitlement to the wages, the employee is entitled to recover liquidated damages equal to triple the amount due. Construction contractors should take particular note of this new statute.  The statute provides that general contractors are jointly and severally liable for the wages owed to their subcontractors’ employees, and are considered to be the employers of such employees.  General contractors doing business in Virginia should immediately review their contract forms to ensure that they make adequate provisions for indemnification in the event that a subcontractor fails to comply with its obligations. Independent Contractor Misclassification Finally, Virginia enacted a new statute to combat independent contractor misclassification.  Independent contractors may now bring a claim for misclassification against their putative employer to recover wages, benefits (including expenses that would have been covered by the putative employer’s insurance), or other lost compensation, as well as reasonable attorney’s fees.  Notably, the statute presumes that any individual performing services in exchange for compensation is an employee, unless the putative employer can show that the person is an independent contractor under the IRS’s independent contractor test.  The use of the IRS test is a small victory for employers, as it is a lower bar to satisfy than the “ABC” tests imposed by many state statutes such as California’s AB5. These enactments substantially shift Virginia’s legal environment in favor of employees.  Employers in the Commonwealth can no longer count on Virginia’s traditional, business-friendly environment.  Polsinelli is available to assist Virginia employers in reviewing their policies, understanding these new requirements, and evaluating the risks of any independent contractor relationships in light of the newly-enacted claims.

On May 8, 2019, Washington Governor Jay Inslee signed into law a bill that prohibits employers from entering into noncompetition covenants with employees whose W-2 earnings are less than $100,000, and with independent contractors paid less than $250,000 per year. In addition to the above, employers should be aware of the following five provisions in the new law: The law creates a presumption that any covenant longer than 18 months is unreasonable and unenforceable as a matter of law.  A party to the covenant may rebut the presumption by showing through clear and convincing evidence that a duration longer than 18 months is necessary to protect the party’s business or goodwill. A covenant will be unenforceable unless the employer discloses its terms to a prospective employee in writing. If a covenant is entered into after employment begins, the employer must provide consideration in addition to employment to support the covenant. If an employee subject to a noncompetition covenant is terminated in a layoff, the covenant is void unless the employer pays the terminated employee base salary for the remainder of the covenant’s terms, less compensation earned through subsequent employment. If a court determines a noncompetition covenant violates the new law, the party seeking enforcement must pay the aggrieved person the greater of the actual damages or $5,000, plus reasonable attorneys’ fees and costs. The new law will take effect January 1, 2020.  Employers with questions regarding Washington’s new law – or that wish to review or implement noncompetition covenants – would do well to consult with competent counsel.

Employers may face risks of departing employees, particularly involuntarily terminated employees, taking the employer’s confidential information or trade secrets with them when they leave.  Putting aside  the employee’s motivation—a desire to compete, spite, or something else entirely—employers should consider protective measures to limit, if not completely cut off, an employee’s access to confidential information and trade secrets attendant to termination of employment. Here are four best practices to limiting an employee’s access to confidential information and trade secrets proximate to termination of employment: 1.  Cut off the employee’s access to Company computer systems during, but not before, the termination meeting.  Use the element of surprise to the Company’s defensive advantage.   An employee who notices that access to Company computer systems has been cut off may sense the impending termination and take efforts to obtain conceal, access, or destroy Company confidential information in paper form or on electronic media. 2.  Remind the employee of all post-employment confidentiality obligations and restrictive covenants during the termination meeting.  The termination meeting may be the last point of direct communication between a departing employee and the employer.  Whether or not the employee heeds the warnings given, the Company is in a better position to enforce its rights having given the departing employee notice of the employee’s obligations, and a paper copy of any applicable agreements. 3.  Gather all Company devices from the departing employee as soon as possible.  The longer the departing employee has access to Company devices, the more likely the devices (and any confidential or proprietary data thereon) will become lost or compromised.  The employee should be given a deadline by which devices at the employee’s home or elsewhere outside the workplace should be returned to the Company. 4.  Consider financial incentives for departing employee compliance.  Employers may condition severance pay, if offered to the departing employee, upon the return of all Company confidential information and devices.   Likewise, in some but not all states, employers may implement policies that condition payout of accrued and unused vacation upon prompt surrender of Company devices and compliance with post-employment confidentiality obligations.

So far in 2018, the U.S. Department of Labor (“DOL”) has issued more than 20 opinion letters navigating the murky waters of the Fair Labor Standards Act (“FLSA”). In late-August, the DOL issued several new opinion letters to which employers can refer for guidance when confronted with FLSA questions.  Herein, we address two important opinion letters.  Later this week, we will address two more. 1. FLSA Retail and Service Establishment Exemption Can Include The Sale of Tech Goods and Services to Commercial Entities The line dividing qualifying (for example, grocery stores, hardware stores, restaurants, hotels, etc.) and non-qualifying “retail or service establishments” can be difficult to divine. For employers (1) selling mostly retail goods and services (in other words, retail, not wholesale, goods and services) and (2) employing individuals who primarily receive commissions – the DOL has addressed an issue of particular interest. The employer requesting DOL’s guidance sold a technology platform to merchants that allowed those merchants to process their customers’ credit card payments via a mobile device, online or in-person. The DOL noted -- even though the employer’s primary customers were, themselves, commercial entities (and not the general public) – the employer still qualified for the FLSA retail or service establishment exemption.  The opinion letter further provides that the employer’s goods and services were not being resold to any other entities and, thus, fully met the exemption. Wage and hour law is usually slower on the uptake regarding changing technologies. This DOL opinion letter is one means by which tech companies can seek guidance with respect to compliance with the FLSA. 2. Motivation is the Key to Any Volunteer Generally, an individual’s time spent on charitable or public endeavors outside of his or her normal working hours is not compensable under the FLSA (though volunteers and interns with for-profit entities are analyzed differently). Here, a nonprofit organization sought DOL guidance regarding whether individuals who volunteered to grade a professional examination should be paid for their grading time. The DOL noted volunteers must freely offer their services (instead of being coerced or pressured into doing so) for their time engaged in their “volunteer” extracurricular public or charitable activities to be non-compensable under the FLSA.  In this situation, the subject individuals all sought to give back to their profession and held highly compensated positions outside of their roles as graders. The DOL opined the nonprofit entity was not required to pay these graders for their time, but could pay for the individuals’ incidental travel, lodging, meals and other expenses (without negating their FLSA volunteer status). Nonprofit organizations should ask volunteers several questions to determine, properly, whether such an individual truly qualifies as a “volunteer” whose time is non-compensable under the FLSA, including: Why are you volunteering? Are you employed elsewhere? Is your employer asking you to volunteer here? Has someone from our organization asked you to volunteer here? Is anyone asking you to volunteer here? Are you also seeking employment through our organization? Are you leveraging this volunteering opportunity as a means to work for our organization? Do you understand you will not be compensated for your time? Do you understand we will not consider you for employment because of this volunteering opportunity? As a better, or even best practice, any nonprofit entity utilizing non-paid volunteers should memorialize in writing answers to these questions and require the volunteer to sign the written understanding.

On August 31, 2018, the National Labor Relations Board (“NLRB” or “Board”) extended the deadline for public comment regarding whether the Board should revisit its 2014 ruling in Purple Communications, 361 NLRB 126 (2014). Employers will recall that the Board’s decision in Purple Communicationsopened the doors for employees to make use of their employer’s email system to engage in union organizing and other protected concerted activities. The Board’s request for briefs from amici was initially issued August 1 in a case styled Caesars Entertainment Corp., Case 28-CA-060841. Specifically, the Board requested that interested amici submit briefing regarding the following questions: Should the Board adhere to, modify, or overrule Purple Communications? If you believe the Board should overrule Purple Communications, what standard should the Board adopt in its stead? Should the Board return to the holding of Register Guard or adopt some other standard? If the Board were to return to the holding of Register Guard, should it carve out exceptions for circumstances that limit employees’ ability to communicate with each other through means other than their employer’s email system (e.g., a scattered workforce, facilities located in areas that lack broadband access)?  If so, should the Board specify the circumstances in advance or leave them to be determined on a case-by-case basis? The policy at issue in this case applies to employees’ use of the Respondent’s “[c]omputer resources.” Until now, the Board has limited its holdings to employer email systems. Should the Board apply a different standard to the use of computer resources other than email? If so, what should that standard be? Or should it apply whatever standard the Board adopts for the use of employer email systems to other types of electronic communications (e.g., instant messages, texts, postings on social media) when made by employees using employer-owned equipment? Briefs from amici must be filed by October 5. Labor watchers have been tracking this issue closely since the Board regained a Republican majority with the confirmation of Member John Ring. We will be following this case on the blog, so stay tuned for further developments.

Employers should be able to definitively identify their “trade secrets” and non-public information.  Indeed, employers may miss out on opportunities for relief from misappropriation of their trade secrets by former employees and competitors if they do not take time to specifically identify and understand their trade secrets.  Before an employer can effectively protect against the theft, disclosure, and misuse of its trade secrets, it must first clearly understand what is—and what is not—a trade secret.  Once the trade secrets are identified, employers should take careful steps to protect trade secrets and confidential information from competitors, as well as departing employees. What are trade secrets? To begin, anything that gives an employer a competitive advantage may be a trade secret.  Trade secrets are a subset of an employer’s confidential information, and can include information about customers or clients, business methods, pricing data, machinery, marketing strategies, techniques, formulas, processes, or virtually anything else that is secret, unique,  and valuable to the employer.  Considered this way, every employer inevitably has some potential trade secrets. Another way to recognize possible trade secrets is by evaluating who has access to the information.  For example, if the information is subject to measures to maintain its secrecy, such as limited physical or electronic access, it may be a trade secret.  Alternatively, if the employer uses contracts with its employees and business partners to protect the confidentiality and limit the disclosure of the information, said information may very well be a trade secret, too. What qualifies as a trade secret? To qualify as a trade secret, the information must generally 1) be subject to measures to maintain its secrecy and 2) derive independent value from being secret.  If the trade secret is not sufficiently protected or becomes public -- even inadvertently -- it could lose its status as a trade secret, decreasing its worth to the employer.  But an employer cannot realistically be expected to adequately protect its trade secrets if it does not first know what it must protect.  That is why it is so important for employers to regularly audit their trade secrets and update their protective measures, as needed. Employer takeaways Departing employees with access to trade secrets pose a significant threat to an employer’s trade secret security, thus necessitating a consistently-enforced protocol to off-board those employees and ensure compliance with any continuing post-employment obligations owed to the employer.  However, upon discovering that a departed employee may be misappropriating trade secrets, courts expect swift action from the employer to protect its assets—including, early, specific identification of exactly what the employer considers as its stolen trade secrets. With proper planning, including routine auditing of its trade secrets and protective measures, an employer can position itself for greater success if it chooses to pursue relief for the theft in court.  Employers with questions regarding trade secret identification or protection should consult with competent counsel.

Recently, a 3-member panel of the National Labor Relations Board (“NLRB” or “Board”) ruled that the University of Pittsburgh Medical Center (“UPMC”) unlawfully prohibited off-duty employees from distributing literature in non-patient care areas of its hospitals. Case Background During a 2016 union organizing campaign at multiple UPMC facilities, hospital managers allegedly threatened off-duty employees with discipline for passing out union materials in cafeterias and outdoor areas of the facilities.  In addition, a manager found union flyers in a break room.  The manager warned employees not to leave materials there that were not directly related to hospital business, then threw the flyers in the garbage.  The union subsequently filed unfair labor practice charges against UPMC, contending, among other things, that UPMC’s Solicitation and Distribution Policy was unlawful. UPMC’s Solicitation and Distribution Policy UPMC’s Solicitation and Distribution Policy defined “off duty” as “any period during which a staff member is not scheduled to work” and “non-working time” as time during a “workday when a staff member is on duty but is not expected to be performing work tasks (i.e., meal periods or breaks).”  The policy lawfully banned solicitation during working time anywhere in a facility, and at any time in patient-care areas. Regarding off-duty employees, the policy stated that “off-duty staff members may not enter or re-enter the interior of their work areas or other work areas within their workplace facility aside from the cafeteria, exercise facility, Human Resources building, for any purpose (including solicitation or distribution) except to visit patients, receive medical treatment, or for other purposes such as are available to the general public.” The Board’s Decision The Board agreed with the Administrative Law Judge’s determination that the Solicitation and Distribution Policy was unlawful because it prohibited off-duty employees, who were permissibly on hospital property, from engaging in solicitation and distribution of union literature.  The Board found that the policy “allowed off-duty employees to access the cafeteria but it prohibited them from soliciting (or being solicited by) employees on non-working time, both in the cafeteria and in other nonworking and non-patient care areas of the hospitals.”  In addition, UPMC was unable to show that the ban on off-duty solicitation was necessary to avoid disruption of health care operations or disturbing patients, which could have justified the policy. Moreover, the Board held that UPMC’s unwritten ban on union materials in non-working areas, such as break rooms, was unlawful, as was the collection and removal of the flyers. Employer Takeaways Hospital policies regarding distribution of literature and solicitation by employees require careful drafting, and consistent, non-discriminatory enforcement.  Hospitals may, and should, maintain lawful restrictions on solicitation and distribution activity including: 1) when and where solicitation and distribution can, and cannot, occur; 2) the rights of on-duty and off-duty employees to solicit or distribute literature; and 3) a ban on solicitation and distribution by non-employees.  Furthermore, Access to Premises policies should dovetail with Solicitation and Distribution policies to ensure limitations on off-duty employees and non-employees will pass NLRB muster.  Employers with questions regarding implementing such policies – or that wish to review their current policies – would do well to consult with competent counsel.

Restrictive covenants, such as non-competition and non-solicitation agreements, typically assist employers to protect their legitimate business interests.  When properly drafted and implemented, an employer can use these types of agreements to limit an employee’s ability to unfairly compete after he or she concludes employment. However, restrictive covenants cannot be used to prohibit regular, ordinary competition.  While some employers may be deterred from considering an otherwise qualified applicant who is subject to post-employment restrictive covenants, there are steps employers can take to limit their exposure to claims of unfair competition when interviewing and hiring employees subject to these kinds of restrictions. Ask about restrictions at the earliest reasonable and possible opportunity.  Be specific when asking about any agreements in which these provisions might be contained.  However, take care to avoid discussing the applicant’s former employer’s confidential information. Obtain a copy of the agreement or agreements if a decision to hire is likely and  review and analyze the enforceability of the restrictive covenants at issue, as well as whether the applicant can perform the position without violating the restrictions. Clearly instruct the applicant not to disclose any confidential information, even if volunteered.  Depending on the restrictions at issue, the new employer may also need to instruct the applicant not to solicit any of the former employer's customers, clients, or employees. Consider also including an attestation to that effect in the offer letter or employment agreement. Evaluate the likelihood of litigation.  Assess the circumstances of the employee’s departure, the similarities between the former position and the new role, the nature of the industry and proprietary information or trade secrets at issue, the business relationship (if any) between the hiring employer and the former employer, and the former employer’s propensity for litigation, among other things. Employers that determine that hiring an applicant subject to restrictive covenants justifies the risks of doing so would do well to discuss proactive options with an attorney.  In some situations, opening the line of communication with the former employer prior to – for example – receipt of a cease-and-desist letter demanding the termination of new hire’s employment can be very productive. The existence of restrictive covenants, standing alone, should not in all cases discourage employers from hiring an otherwise qualified candidate.  With careful planning, a savvy employer can substantially limit its exposure to interference and misappropriation claims and position itself with a strong defense should the former employer decide to pursue action against it.

On May 4 and May 13, 2017, the New York Times published an op-ed and article in which the authors asserted—in support of arguments disfavoring non-competition agreements—that California voids all non-competition agreements.* This is an overstatement of California law, which generally prohibits non-competition agreements in the employment context, but narrow exceptions do exist: Sale of a business. When a business owner sells the “goodwill of the business” or otherwise sells his or her ownership stake, the parties may agree to restrict the seller’s ability to compete with the buyer in the same geographic area where the business operates. (Cal. Bus. & Prof. Code § 16601). This is true in the context of a sale even (and especially) when the seller becomes an employee of the buyer. Dissolution/termination of a partnership. When a partner sells or otherwise disposes of his or her partnership interest in a partnership, the parties may agree to restrict the seller’s ability to compete within the same geographic area where the partnership is located, so long as part of the consideration provided to the selling partner is for his or her share of the “goodwill” of the partnership. (Cal. Bus. & Prof. Code § 16602) Dissolution/termination of a Limited Liability Company (LLC). When a member of an LLC sells or otherwise disposes of his or her interest in the LLC, the parties may agree to restrict the seller’s ability to compete within the same geographic area where the LLC is located, so long as part of the consideration provided to the selling partner is for his or her share of the “goodwill” of the LLC. (Cal. Bus. & Prof. Code § 16602.5) Protection of trade secrets. Companies may restrict an employee’s (or former employee’s) ability to use its trade secrets. Whether a company can use a non-competition agreement to do so, however, is a much murkier proposition under California law. A company would be required to demonstrate that a non-competition clause is “necessary” to protect the trade secrets at issue, which most California courts decline to find. In addition, other statutes protect trade secrets (e.g., the Uniform Trade Secrets Act, the Defense of Trade Secrets Act, certain non-solicitation provisions) and are likely a more successful tool to accomplish this important goal. Non-competition agreements are narrowly enforced and strictly interpreted against employers in California. Employers who wish to make use of such agreements should consult with their Polsinelli labor and employment attorney when considering whether to draft non-competition agreements. Employers should also consider other restrictive covenants when seeking to protect company intellectual property, including non-solicitation of customers, which may be more enforceable in California employment agreements or severance documents. *Non-competition agreement is a restrictive covenant to prevent employees from leaving their current employer to go to work for the employer’s competitor.

Recently, the U.S. District Court for the Eastern District of Pennsylvania determined a former employee did not violate the Defend Trade Secrets Act (“DTSA”) where she disclosed confidential information of her former employer to her husband and her attorney. In Christian v. Lannett Company, Inc.,[1] plaintiff Wendy Christian sued her former employer, Lannett, alleging violations of Title VII, the ADA, and the FMLA. In response, Lannett counterclaimed, alleging Christian violated the DTSA by misappropriating Lannett’s trade secrets.  The DTSA defines a misappropriation of trade secrets where one discloses or uses another’s trade secret without the consent of the trade-secret owner.  However, the DTSA also provides immunity for the disclosure of a trade secret “in confidence…to an attorney…solely for the purpose of reporting or investigating a suspected violation of law.”[2] Here, Lannett alleged that Christian violated the DTSA by disclosing Lannett’s trade secrets to (1) her husband and (2) her attorney. Christian moved to dismiss the DTSA claims. With regard to the alleged disclosure to her husband, Christian argued that any alleged disclosure predated the DTSA’s effective date and, thus, she did not violate the DTSA as a matter of law. The Court agreed, reasoning the DTSA does not provide for retroactive enforcement. Similarly, Christian’s disclosure to her own attorneys in discovery -- coincidentally carried out one day after the DTSA’s effective date – also did not amount to a misappropriation under the DTSA.  Indeed, the “disclosure” of Lannett’s trade secrets was made to her own attorneys pursuant to a discovery order of the Court, and, further, Lannett had not pleaded any facts showing that Christian’s attorneys intended “to use or disclose the purported trade secrets they acquired to anyone other than Defendant, to whom the trade secrets belong.” Though it is imperative for employers to protect their proprietary information and trade secrets, this case serves to remind employers to think carefully about their business objectives prior to raising DTSA claims.  Employers considering whether and how to best protect their trade secrets and proprietary information would do well to consult counsel. [1] No. 2:16-cv-00963-CDJ, E.D. Pa. [2] 18 U.S.C. §1833(b).

As a general matter, many courts disfavor restrictive covenants in the employment context because they restrain trade. However, the law also seeks to prevent unfair competition. As a result, if an employer can point to a legitimate business interest in need of protection, it may be able to enforce a restrictive covenant agreement (RCA) that is narrowly tailored to protect that interest. What constitutes a protectable interest? This varies from state to state; however, courts typically recognize an employer’s need to protect the following: Confidential information and trade secrets Longstanding customer goodwill The value of specialized training Workforce stability. As with other considerations related to the enforceability of RCAs, what qualifies as a protectable interest will vary from state to state. To protect these interests, employers typically employ a combination of the following devices: Nondisclosure Noncompete Customer/client nonsolicitation Employee nonsolicitation. Of these, a non-compete is the most difficult to enforce and will receive the closest scrutiny from a court during an enforcement action. Unlike a nonsolicitation provision, which focuses on preventing a former employee from stealing an employer’s customers on behalf of a competitor, a non-compete provision prevents an employee from working for that competitor at all. Because a non-compete can significantly limit an individual’s ability to earn a living, courts will evaluate a number of factors to determine whether the non-compete is reasonably necessary to protect the employer's interest—commonly referred to as the “Rule of Reason.” Click through toread the full article regarding the enforceability of restrictive covenants in different states and best practices employers can take to maximize their chances to enforce restrictive covenants. Note: this article was first published in Employee Relations Today’s Fall 2017 Edition, 2018 Wiley Periodicals, Inc.

It’s a new year, and a new session for the active California Legislature. On January 3, 2018, in a likely effort to respond to the #MeToo movement, the Stand Together Against Non-Disclosure Act (“STAND” or the “Bill”) was introduced in the California Senate.  The Bill seeks to prohibit parties, including all public and private employers in California, from including nondisclosure provisions in settlement agreements in cases involving sexual assault, sexual harassment and/or sex discrimination. Intends to Expand Existing Law: California law currently prevents parties from including confidentiality provisions in settlement agreements related to claims for certain sexual offenses, including felony sex offenses, childhood sex abuse, sexual exploitation of a minor, or sexual assault of an elder or dependent adult.  The STAND Act seeks to expand these prohibitions to claims for sexual assault, sexual harassment and sex discrimination, unless a claimant requests the inclusion of a nondisclosure provision in the settlement agreement.[1] Unintended Consequences: As currently drafted, the Bill appears to have at least three unintended consequences: Permits the inclusion of confidentiality provisions in settlement agreements for claims that have yet to be filed with the courts.  Thus, parties may seek to resolve a claim prior to filing.  Many sexual misconduct lawsuits are highly fact intensive and at times require significant investigation.  Employers will likely have more incentive, especially in the current charged environment, to resolve a claim regardless of whether they believe there was misconduct to avoid public disclosure and potential damage to the employer’s reputation.  Consumer Attorneys of California believe that confidentiality provisions at the request of the claimant will provide a guarantee of privacy to those who would not otherwise speak out.  The unilateral election for confidentiality in the hands of the claimant could result in higher settlement demands for the inclusion of a confidentiality provision in the settlement agreement. Once a complaint is filed, parties may be less likely to settle the claim since confidentiality cannot be required in a settlement agreement post-filing of the complaint.  This may result in the use of additional judicial resources, including more jury trials and law and motion filings. Stay tuned as this important Bill works its way through the legislative process.    ------------------------------ [1] Please see our recent blog regarding provisions of the recently passed Tax Cuts and Jobs Act of 2017 that provide negative tax consequences to employers that include confidentiality provisions in settlement agreements resolving allegations of sexual misconduct.

In a post-Defend Trade Secrets Act world, employers have a host of civil remedies available to them for the misappropriation of trade secrets under both state and federal law. To obtain relief, an employer must establish that the information it claims is subject to trade secret protection is, in fact, protected as confidential and secret. Below we outline five actions an employer might consider to demonstrate it has taken the necessary measures to protect the secrecy of its confidential information. Written agreements with employees who have access to trade secrets.These agreements may contain confidentiality, non-disclosure, non-solicitation, or non-competition provisions. To be effective, it is critical that such agreements define clearly what constitutes “confidential information,” and include a clause affirmatively requiring the return of such “confidential information” upon the termination or resignation of the employee. Written policies governing employee conduct.Employers should set forth clear rules for marking and maintaining confidential information, such as written instructions related to copying and sharing of confidential information. Employers can also include restrictions on the sharing or disclosure of confidential information in employee handbooks or other policies that are shared with all employees. Limiting employee access to trade secrets.This may include limiting physical access to documents stored in hard copy, by, for example, limiting locations where the confidential information is maintained, locking those locations, and tracking individuals accessing the information. Employers should also take care to protect electronically-stored information by, for example, employing password protection on documents and databases containing confidential information, restricting access to such documents on external devices, and implementing security monitoring measures. Limiting outsiders’ access. Similarly, employers should limit outsider access to areas housing confidential physical documents and devices with access to electronically stored information. Depending on the information, this may include the use of security guards or cameras, perimeter fencing, visitor badges with log in and out procedures, and security card access to certain areas. Controls on public dissemination.Employers may consider designating an employee to review and approve publicly disseminated information, including publications, presentations, promotional materials, and website content to ensure trade secret information is not inadvertently disclosed. Employers should also carefully evaluate the scope of information shared in meetings with potential partners or customers, and may further consider requiring meeting participants to enter into non-disclosure agreements if confidential information must necessarily be shared. Employers should remember that any security measures should be regularly monitored, audited, and updated to maintain their effectiveness. Efforts to maintain these procedures may pay dividends should the employer have to pursue a former employee for trade secret theft.

Many states allow businesses to require employees to sign agreements restricting their competitive activities following the termination of employment. Such restrictive covenant agreements, including non-competition and non-solicitation agreements, can be great tools to protect an employer’s business interests. Business owners should keep the following in mind to increase the chances that the restrictive covenant agreements are enforced: What is the employer’s protectable interest? An employer generally must set forth a protectable interest to justify the prohibitions contained in a restrictive covenants agreement. Protectable interests can include trade secrets, customer relationships and customer-related information, and confidential business information. If an employee does not have access to confidential business information or trade secrets, or does not have access to client information or contact with clients, a restrictive covenant agreement may not be enforceable against that employee.  Are the geographic, temporal, and/or customer restrictions contained in the restrictive covenant reasonable? Overbroad restrictions will generally not be enforced. For example, a restrictive covenant preventing an employee from working anywhere within the United States following the end of his or her employment is often not enforceable (with limited exceptions). Likewise, a restriction preventing an employee from contacting any/every customer of the business may also not be enforceable with respect to customers with whom the employee had no material contact during his or her employment.        Did the employee receive adequate consideration for entering into the agreement? In some states, continued employment is not sufficient consideration for a restrictive covenant agreement. In other words, in those states, the restrictive covenant agreement must be supported by additional consideration separate and apart from continued employment to be enforceable.  Also, remember that restrictive covenant agreements should be signed by both the employee and a representative of the company to be a binding contract. While restrictive covenant agreements can be useful tools to protect your business, they are considered restraints of trade, and courts may look for reasons to either lessen their impact or strike them outright. Carefully drafted agreements are more likely to be enforced, protecting a business from former employees who may seek to exploit the knowledge gained and relationships cultivated on behalf of a new employer.

Your company has worked hard to ensure that its trade secrets are protected under the applicable state laws, and modified its contracts and policies to reflect the new federal trade secret protection standards. When your company has grown internationally, what happens then to trade secret protection? What can your company do to ensure that secrets fundamental to your business remain protected, even internationally? The answer is both complicated and surprisingly simple. There are various international treaties as well as individual national (and sometimes regional) laws that are implicated. For the purpose of this blog, we will focus on strategies for developing a trade secret protection program that takes into consideration commonalities found in trade secrets laws throughout Asia and Europe. Of course, each country has its own laws, and each contains certain nuances that your company will want to address when implementing country-specific protection programs. Companies are advised to seek counsel on the application of each country’s specific trade secret laws as well as the applicability of any treaties. For purposes of developing a baseline trade secret protection policy, many of the country-specific laws have some similarities, which will help a U.S. company looking to expand internationally to protect their trade secrets. Here are three commonalities expanding companies should consider when drafting trade secret protection program: Agreements.Many countries around the world value agreements between parties and employees that establish the expectations regarding the protection of the company’s trade secrets. Generally, the agreement should include a clear identification of the applicable trade secrets, the specific confidentiality expectations, and the penalty for wrongful disclosure. While each country may have their own contractual standards and the weight given to a non-disclosure agreement, a clear description of the expectations of each party is generally valued. Employment Policies. If a U.S. corporation has employees in another country, the company should have employment policies related to the protection of trade secrets. The protective policy should clearly delineate the trade secret and confidential information, the expectations the company has in regard to the protection of its trade secrets, and the role employees play in protecting the trade secrets, during and after the termination of the employment relationship. In addition, policies should include the penalty an employee can expect if the policy is violated. In some countries, for example, the U.K. and Germany, policies that unambiguously demonstrate the company’s expectations may even form the basis of an enforceable duty under tort law. Segregation of Trade Secrets.Many countries value a company that takes internal action to protect its trade secrets. One common method for the internal protection of trade secrets is segregating the trade secrets, either electronically or physically, from all other items and materials. Access to trade secrets should only be given to those who are required to use the protected materials. South Korea, for example, requires that trade secrets be maintained as confidential with “substantial effort” on the part of the company. Similarly, German courts will scrutinize the steps a company takes to ensure that only those who need to know the trade secrets are granted access. Companies expanding internationally should consider the appropriate methods to protect their trade secrets and should plan in advance to ensure their materials are secure. By taking some general steps, along with complying with each country’s unique laws, a company will be equipped to protect those things that make it unique in the marketplace.

In Acclaim Systems, Inc. v. Infosys, Ltd, et al., the Third Circuit demonstrated that ignorance can sometimes be bliss when it comes to restrictive covenants. In that case, a large cable provider contracted with Acclaim Systems to provide information technology consulting services for a customer relations platform. Partway through the project, the cable provider transferred the work to Infosys. One Acclaim Systems employee and three subcontractors followed the project to Infosys. Each of the four workers had non-competes that prohibited them from working for another company on the cable project. Infosys never learned of those agreements despite asking the workers (including a question on the job application) and asking the staffing company providing the subcontractors. The Third Circuit affirmed summary judgment for Infosys because it could not intend to interfere with non-competition covenants of which it was unaware. This case highlights four important employment practices. 1.    Ask Questions When On-Boarding As the decision in Acclaim Systems demonstrates, asking potential employees, contractors, and staffing companies whether a worker or contracting company has signed any restrictive covenants can be a key strategy to avoid tortious interference claims. In particular, a question on a job application and a covenant in a contract can be important evidence that the employer or contracting principal performed due diligence. Indeed, the decision in Acclaim Systems suggests that a company that does not ask about restrictive covenants to avoid claims of tortious interference could still be liable for tortious interference, particularly in industries like information technology consulting where restrictive covenants are common. 2.    Provide a Copy of Agreements at Departure In addition to verbally reminding workers of any applicable restrictive covenants during exit interviews, companies that obtain restrictive covenants should provide the worker with a copy of the executed restrictive covenant agreement (and should document what was provided). This practice not only ensures that the worker can consult the actual terms (as opposed to his or her potentially faulty memory), but it also makes it possible for the worker to provide the agreement to potential employers and contracting principals. 3.    Notify Subsequent Potential Employers and Contracting Principals As explained in a prior blog post,  contacting potential and subsequent employers and contracting principals can be an important strategy in enforcing restrictive covenants. In addition to verbal contact, companies should consider sending a copy of the agreement containing restrictive covenants to potential and subsequent employers and contracting principals before or even after an alleged breach. 4.    Get Permission to Notify Potential and Subsequent Employers and Contracting Principals A company obtaining restrictive covenants should consider including a provision permitting the company to notify potential and subsequent employers and contracting principals of the restrictive covenants. The company can make the new employer or contractor aware of the worker’s obligations while minimizing the risk of contractual interference or other claims from the worker.

This week, Jimmy John’s Enterprises, LLC (Jimmy John’s), a sandwich chain known for its “freaky fast” delivery service, promised to end its practice of forcing its employees to sign non-competition agreements. In doing so, Jimmy John’s settled a June 2016 lawsuit filed by the Attorney General of the State of Illinois, which accused the Charleston, Illinois-based sandwich company’s non-competition agreements as unenforceable under Illinois law. For years, Jimmy John’s required its employees to sign non-competition agreements. Specifically, as a condition of employment, employees were required to agree in writing that for a two year period post-employment, they would not work at another business that 1) earns ten (10%) percent of its revenue from selling subs or deli sandwiches, and 2) was located three miles from any Jimmy John’s store (regardless of the location at which the employee worked). The Illinois Attorney General alleged that such an agreement was unenforceable under Illinois law because it was not premised on a legitimate business interest or narrowly tailored. As part of the settlement, Jimmy John’s agreed to rescind all signed non-competition agreements and inform all of its current and former employees that the agreements they signed are unenforceable. The company also agreed it will not require new hires to sign any agreements restricting them from working for other sandwich shops. Finally, Jimmy John’s agreed to pay $100,000 to the State of Illinois for the purpose of increasing public awareness about the legal standards for such restrictive covenants. Jimmy John’s likely intended to change its practice of requiring employees to sign non-competition agreements at the end of this year. Starting on or after January 1, 2017, the Illinois Freedom to Work Act prohibits Illinois employers from requiring employees who make less than $13 per hour to sign non-competition agreements. This settlement in Illinois comes on the heels of a similar settlement between Jimmy John’s and the Attorney General for the State of New York. Earlier this summer, Jimmy John’s agreed to stop using non-competition agreements in New York, and further promised it would not enforce such agreements against current or former employees. These settlements should remind employers that non-competition agreements are not appropriate for all employees, even if reasonable in duration and scope. In states like Illinois, non-competition agreements must be narrowly tailored and premised on a legitimate business interest to be enforceable. Also, some states and courts disfavor non-competition agreements as restraints on trade, especially where they restrict lower wage earners who do not receive confidential information or trade secrets. Thus, employers should review the use of non-competition agreements with counsel prior to their implementation. RESTRICTIVE COVENANTSDECEMBER 14, 2016

Employers want their employees focused on work tasks while at work and not on personal business. Relatedly, employers, and many employees, want the work environment to be free from co-worker solicitations, regardless of topic. To achieve these goals, some employers may seek to implement policies that broadly prohibit co-worker solicitations and the conduct of personal business in the work place. While seemingly innocuous, these policies have received increased scrutiny from the National Labor Relations Board (“NLRB”). Employers should keep several tips in mind when drafting employee solicitation policies. The NLRB was formed to administer and enforce the National Labor Relations Act (“NLRA”). The NLRA generally defines the rights of employees to organize, join or assist labor organizations, to bargain collectively, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection such as wages, hours, and working conditions. The NLRA provides that employers may not interfere with, restrain, or coerce employees in the exercise of their NLRA rights. Over the past few years, the NLRB has been increasingly focused on how certain policies may have the potential to “chill” employees’ protected exercise of NLRA rights. Here are some tips to ensure employer policies do not potentially chill employees’ protected rights: Be Precise.Be specific about the types of solicitation or personal business that is prohibited. Ensure the items that are prohibited are not protected by the NLRA. Even if you do not intend to restrict employees’ rights to engage in protected activities, over broad policies may be seen as “chilling,” and thereby impermissible. Timing is Critical. Limit carefully tailored non-solicitation or personal business prohibitions to working time. Policies that arguably prohibit activity “while at work” or during “scheduled working hours” may violate the NLRA because those phrases may cover time when the employee is exercising protected rights at the employer’s location, but not actually working, including during lunch, breaks, and before and after “on-the-the-clock” work. Be Consistent and Non-Discriminatory.If an employer permits employees to talk about non-work-related matters during work time, then policies should not prohibit discussions between employees about NLRA-protected rights during work time. Location Can Matter.If policies have some type of prohibition against the distribution or posting of materials in certain areas of a facility, then this prohibition only should apply to work areas. If an area is a non-work area or is a mixed work/non-work area, a general prohibition against the distribution and posting of materials in these areas may be unlawful, absent some special circumstance related to the interference with work or equipment. Despite employers’ best intentions, an over broad policy can unlawfully chill employees’ rights to engage in protected concerted activity. Careful drafting of handbook policies related to other business and solicitation may defrost these policies, making them permissible. Policies must be narrowly tailored so that there is no doubt that employees are allowed to communicate about wages, hours, and other working conditions and union and collective bargaining during non-working times. Given the particularity of prose needed for such policies, employers should have their handbooks reviewed and updated by legal counsel on a regular basis.

On July 6, 2016, Pokémon Go was released in the United States. Almost overnight, the location-based, augmented reality game became a national, if not global, phenomenon. You cannot turn on the television, listen to the radio, read news headlines, or even walk out your front door without hearing about the game or seeing individuals using their smartphones and tablets to “find” and “capture” digital creatures that virtually appear at specific locations. While Pokémon Go may sound like a harmless, albeit distracting, “video game,” it poses a risk to cyber security and raises concerns about data vulnerability in company databases and systems. Games like Pokémon Go require users to download and install an application on the users’ phones or tablets. Users are not always aware if they have downloaded an infected version of the application, which may allow hackers to spy on the victim’s phones and gain access to their data. Some infected versions of the Pokémon Go application have contained a backdoor called DroidJack. DroidJack gives attackers complete access to mobile devices, including user text messaging, GPS data, phone calls, camera—and any business network resources they access.    Even if an employee does not download an infected version of an application, there are still cyber security concerns. Individuals are often quick to download the latest application to access or share data for games like Pokémon Go, without scrutinizing what they are granting the application access to. In the event of a hack targeting a popular application like Pokémon Go, attackers have the potential to access all the data of application users who have not limited the application’s access to their data, including proprietary business information.   In light of the popularity of games like Pokémon Go and the inevitability that similar games or social media applications will become widespread, employers should take measures to deal with how and where business mobile devices can be used to ensure their proprietary information is not being captured by third parties. Electronic device policies can be very effective in limiting an employer’s cyber security risk where the policy requires employees to refrain from downloading and accessing smartphone apps, websites, programs and files that may pose a security risk if the electronic device is used to connect to sensitive corporate information. Employers should also consider updating electronic device policies to require employees to install company encryption software for protecting sensitive data with an agreement signed by employees to not modify the software.

In Medtronic, Inc. v. Amanda Ernst and Nevro Corporation, a state court forum selection clause in an employment agreement was not enforced, and remand to state court was denied. Because the former employer served the new employer, and the new employer removed the case before the former employee bound by the forum selection clause was served, the court ruled that the employee’s consent to removal was unnecessary and the forum selection clause was not triggered. Further, the court determined that the new employer was not a closely related party that could be bound by the employee’s contractual agreement to the forum selection clause. This case has four important lessons for employers seeking to enforce forum selection clauses in employment agreements. Parties  For many companies, the immediate impulse upon learning that a former employee has violated an employment agreement or restrictive covenant is to sue the former employee andthe new employer. Sometimes the new employer is a necessary party to stop theft and anti-competitive tactics. Other times naming the new employer is simply a matter of principle (or reflex). As the Medtronicorder demonstrates, suing a non-party to the employment agreement, such as a former employee’s new employer, can defeat enforcement of a forum selection clause and should be considered anew for each case. Joint Representation For former employees and new employers defending against lawsuits brought by former employers, sharing counsel can be efficient and cost-effective. As the Medtronicorder demonstrates, although joint representation is just one part of the closely related party analysis, it should be considered when analyzing the enforceability of a forum selection clause.   Service Especially in cases where the former employee and new employer are outside of the contractually selected forum, the same process server may not be engaged to serve the former employee and the new employer. As the Medtronicorder illustrates, it is important to coordinate service on the former employee and the new employer in cases where there is a chance of removal. Choice of Law Because of variations in state employment laws, there may be times when a company could improve its chances of enforcing one clause in a contract (e.g., forum selection and choice of law) by waiving its rights under the other clause. As this blog has pointed out before, getting too greedy can be costly – especially when it comes to enforcing restrictive covenants. Accordingly, companies should make decisions about whether to enforce a forum selection clause on a case-by-case basis. Further, a company should consult employment counsel when hiring in a new state to analyze whether to modify its existing forum selection and choice of law clauses.

A well-drafted employee confidentiality and non-disclosure agreement can protect confidential information from flying out the door with current and former employees. Employers should, however, carefully define the “confidential information” sought to protect. A boilerplate definition of “confidential information” may risk a seemingly routine agreement invalidated for chilling discussions of wages and other protected activities under the National Labor Relations Act—even for non-union employers. Take the 2014 case of Flex Frac Logistics, LLC v. NLRB from the Fifth Circuit Court of Appeals. Flex Frac—a non-union employer—required employees to sign confidentiality agreements that prohibited the dissemination of “Confidential Information” outside of the company. Flex Frac’s agreement defined its “Confidential Information” to include “our financial information, including costs, prices; current and future business plans, our computer and software systems and processes; personnel information and documents, and our logos, and art work.” A former Flex Frac employee filed a charge with the National Labor Relations Board, alleging that the company agreement violated the NLRA because it prohibited employees from discussing wages. An administrative law judge and the NLRB found that Flex Frac’s confidentiality agreement violated the NLRA, despite the fact that the agreement contained no direct reference to wages or other terms and conditions of employment. The agreement was deemed “overly broad” for including language that an employee could reasonably interpret as restricting the exercise of Section 7 rights, which include discussions of wages with other employees and third parties to concertedly seek higher wages. In enforcing the Board’s order, the Fifth Circuit reasoned that, by including such phrases as “financial information” and “costs,” the confidentiality clause necessarily included wages, which created the inference that the agreement prohibited wage discussion with outsiders.  Further, the agreement gave no indication that some personnel information, including wages, were outside its scope, and that by specifically identifying “personnel information” as a prohibited category, Flex Frac implicitlyincluded wage information within the ambit of the restrictions. Importantly, the Fifth Circuit stated that the outcome might have been different if Flex Frac had included a disclaimer noting explicitly that the prohibitions of the agreement were not intended to prohibit the employee form discussing information pertaining to the terms, conditions, wages, and benefits of her employment with other employees or third parties. Ultimately, employers should consider some type of disclaimer language in confidentiality policies and agreements to avoid the risk of those agreements being deemed unlawful. Indeed, even confidentiality agreements that do not expresslyprohibit discussing the terms and conditions of employment may run afoul of the NLRA and create liability. Such disclaimer language should take heed of the Fifth Circuit’s reasoning, and note that the definition of “confidential information” is not meant to include discussions of the terms, conditions, and benefits of their employment.

It happens often: a key employee notifies her supervisor that she has accepted a job with a competitor and will be leaving the company.  The initial reaction is panic—“she can’t leave, she knows everything about our business, she knows all of our trade secrets, and she knows our confidential business strategies.”  A call is made to outside counsel and everyone gears up for litigation against the former employee and her new employer.  But, is that the only course of action? Make every reasonable effort to retain the employee. If you are dealing with a key employee whose departure will be costly to the organization, you should assess whether it is possible and desirable to retain the employee.  Do not automatically assume the employee is out the door and cannot be convinced or enticed to stay.  Whether it is an issue of compensation, additional vacation time, freedom to work on projects of her choosing, or some other non-monetary perk or benefit, employers should fully explore all available options at their disposal to retain the employee.   Negotiate assurances with the departing employee. If retaining the key employee is not an option, meet with the person, ideally prior to the exit interview, to address the departing employee’s post-employment obligations with respect to the employer’s trade secrets and confidential information:   •    Explain the importance of preserving the secrecy of the trade secrets and confidential information they had access to or developed during their employment.   •    Discuss all confidentiality, nondisclosure and covenants not to compete that the person may have executed.   •    Ask them if they have any questions or concerns about any areas of their work and any matters which may not be clear to them.   •    Find out where the departing employee is going, what they will be doing, and when they plan to begin work for the new employer. •    Ask the employee two important questions:  1) are you certain that you can perform your new job without using or disclosing our trade secrets and confidential information? 2) will you notify us if you are ever asked to use or disclose any of our trade secrets or confidential information?   •    Have at least two persons present for the meeting and document the meeting with a checklist that the employee initials to indicate that you covered the topics in your meeting. Contact the new employer. Consider contacting the new employer after your meeting and before the employee’s start date.  The purpose of this contact is to inform the new employer that the departing employee executed one or more written agreements in which they agreed not to use or disclose confidential information and trade secrets belonging to the company.  Describe the former employee’s work in general terms, but provide enough specificity to place the new employer on notice of the areas that you are most concerned about.  Detail the efforts you have undertaken to obtain assurance from the departing employee that she will honor her obligations of confidentiality and that she has provided assurance that her new job will not require her to use or disclose your trade secrets.  Request confirmation from the new employer that they will not ask nor allow her to use or disclose any of your trade secrets in her work for them. Taking these steps will not eliminate the need for litigation in every departing employee situation.  Sometimes, litigation may prove to be the only means of protecting against imminent use and disclosure of your trade secrets.  But, when followed these steps may reduce the number of lawsuits filed merely out of an abundance of caution, because an employee “inadvertently” disclosed trade secrets, or because a new employer was not aware of the former employee’s previous work.  And if followed, these steps will strengthen the foundation of any trade secret litigation that you may be forced to initiate. Next week’s blog post will discuss the steps to follow preparing for such a lawsuit.

Separation and severance agreements are intended to provide finality to the employment relationship. Without careful drafting, however, this goal can be frustrated by the National Labor Relations Act (“Act”), which applies to non-management employees, both union and non-union, including when employees sign separation or severance agreements. In Quicken Loans, Case 28-CA-146517 (Mar. 17, 2016), an Administrate Law Judge of the National Labor Relations Board invalidated three common severance agreement provisions (a confidentiality clause, a company property return clause, and a non-solicitation of employees and customers clause) as over broad and chilling the exercise of rights protected by the Act. Understanding why these common severance agreement provisions were invalidated can assist with drafting non-management severance agreements to include lawful restrictions protecting business information and assets. Confidentiality Clause The Act permits employers to prohibit current and former employees from misappropriating trade secrets and other legally protected confidential and proprietary information.  A confidentiality clause requiring secrecy of documents or information not maintained in secrecy by the employer, or which concern wages, work rules, or other terms and conditions of employment, should not be subject to a post-employment confidentiality clause.  Company Property Return Clause Employers have the right to demand that departing employees return computers, phones, and other tangible and intangible property (including documents containing trade secrets and legally protected confidential information) to the employer.  Company property subject to return, however, should not include employment handbooks and manuals with generally applicable employment policies, which generally do not qualify as legally protected information.   Non-solicitation of Employees Clause Employers should avoid separation agreement language prohibiting solicitation of employees “for any reason,” or for specified reasons that are an unlawful restraint of trade under applicable state law.  Under the most recent NLRB administrative rulings, an over broad non-solicitation clause may reasonably chill communications about wages and working conditions, and inhibit NLRB investigations, protected by the Act. When drafting employee severance and separation agreements, employers should be mindful of the breadth of post-employment restrictions and how they may implicate rights protected under the Act.