Michael Elkins is a partner and founder of MLE Law, an employment and employment law firm. He noted that „non-compete obligations are generally regulated by state laws, which are very different. For example, Florida enforces non-compete clauses at a high rate, while California has an almost complete ban. The Federal Trade Commission could try to improve the rules of the game through a national ban. President Joe Biden today signed an executive order that, in addition to promoting competition in the U.S. economy, also aims to prohibit or restrict non-compete obligations for workers that companies rely on to protect their legitimate business interests. The ban could trigger a crisis for many executives. „Understanding the extent of an employer`s current non-compete obligations will allow the employer to make the necessary adjustments if and when the FTC takes action,“ Elkins advised. According to NPR, „The White House estimates that about half of private sector companies use non-compete obligations for at least some of their employees, affecting between 36 and 60 million workers. The figures come from a 2019 report by the Left-Wing Economic Policy Institute that surveyed 634 employers. Some States have already banned such agreements. According to Dolghih, „Non-compete obligations are particularly useful in ensuring that employees who have had access to a company`s confidential information and specialized training cannot simply open a business with their employer and use the information they have learned at work to compete with that employer.
A recent California Court of Appeals ruling that an employer`s decision to comply with a competitor`s non-compete obligation amounts to a violation of California Business and Professions Code Section 16600 and therefore violates public policy highlights the trap 22 that employers face when hiring employees subject to the obligations. not to compete. Given the uncertainty about the applicability of California`s non-compete obligations — which are considered void under California law unless they are considered a legal exception — employers seeking to avoid litigation from former employers may still be vulnerable to unlawful termination actions by employees who are subject to these agreements. „Ultimately, non-compete obligations serve a very important purpose and should be enforceable in all states. Instead of taking steps to eliminate them, the current government should focus on implementing a set of rules/regulations designed to ensure that non-compete obligations are appropriate in their scope and interpreted consistently in a way that is fair to employers and employees,“ he said. Many entrepreneurs are either unrecognizable by a new government law on non-compete obligations or don`t know the scope of the law, which went into effect on Jan. 1, says Stephen Bergman of Cooney Law Offices PS in Spokane. Burden balancing: The New York approach requires a balance between the burden that a non-compete obligation imposes on the employee and the interests of the employer, which are protected by the non-compete clause. The burden on the employee is obvious – a non-compete obligation restricts a person`s ability to work in the occupation of their choice. See e.B.
Reed, Roberts Assocs., Inc.c. Strauman, 40 N.Y.2d 303, 307 (1976) („No restriction should be able to apply to his advantage the right of a worker to apply the skills and knowledge acquired through the general experience of his previous activity“, including techniques which are only qualified generic processes known to the profession“). The new non-compete obligations can only be imposed on employees who earn at least $100,000 per year or $250,000 per year for an independent contractor. „This law is not as catastrophic as it may seem at first glance,“ Drake says. Dolghih noted: „Many companies rely on non-compete clauses to protect their legitimate business interests. This includes protecting the confidentiality of trade secrets, preserving customer goodwill, and protecting investments in employee education and training. „Currently, a former employer with an enforceable non-competition clause can enforce such an agreement in court without having to prove that a former employee collected confidential information when they left or actually use it in their new job,“ she noted. „Employers should prepare by analyzing their current non-compete rules to ensure they comply with their state law,“ Elkins advised.
„Next, they need to prepare for possible FTC actions by knowing in advance which employees have these agreements so they can assess whether they fit into the FTC`s actions. I guess we will not see a complete ban, but rather a ban on lower-level workers. „However, where non-compete obligations are prohibited, companies must rely on complex trade secret misappropriation laws to protect their confidential information. Lawsuits under trade secret misappropriation laws can become very costly, and while Apple, Amazon, and other large companies may bear the cost of such litigation, many small businesses simply won`t be able to afford it,“ she said. While the Silguero decision is not surprising in that it is consistent with California courts` broad interpretation of Section 16600, it signals a significant expansion of the law that raises new red flags for California employers. First, employers must take steps to determine which covenants employees may be subject to and whether the covenants, and not to compete, can be held to be unenforceable by a California court at some point in the future. This can be especially difficult if an agreement is entered into outside of California or contains choice of law or location provisions that raise questions about the law of the controlled state or the court that will interpret the agreement. Second, employers need to be aware of these risks not only when laying off existing employees, but also when recruiting and hiring new employees. The previously preferred way to minimize the risk of litigation from a former employer by rejecting a candidate is now complicated by the risk of litigation from an employee. Employers now face increasing scrutiny from California courts to determine whether their actions constitute an „indirect“ no-hire agreement that violates public order. California employers should seek advice if they plan not to hire or fire an employee who is subject to non-compete obligations or other restrictive agreements.
„Concerns about intellectual property and trade secrets can often be addressed in employment contracts, but in the real world, it`s hard to prove misappropriation of information after an employee jumps off the board and starts working for a direct competitor. Of course, you can take legal action once the injury is evident in the future, but the damage may have already been done,“ he noted. After the Court of First Instance granted Creteguard`s request to dismiss Silguero`s action for unlawful dismissal in breach of public policy, the Court of Appeal set aside and reinstated the action. The Court of Appeal held that the „agreement“ between Creteguard and its competitor amounted to the type of indirect non-lease agreement found unenforceable in VL Systems, Inc.c. Unisen, Inc. 152 Cal.App.4th 708 (2007). The Court of Appeal noted that non-compete prohibitions under Section 16600 „constitute strong state public policy“ – which departs from the rule in most states that non-compete obligations are valid and enforceable as long as they are „reasonable“ – and rejected Creteguard`s argument that Section 16600 does not impose liability on third-party employers for non-compete obligations between employees and their former employers. Were. „For companies whose success relies on trade secrets such as customer lists, secret recipes or other proprietary methods and processes, a ban on non-competition will significantly affect their ability to protect this information from use by former employees and competitors,“ she said.
In Silguero v. Creteguard, Inc. (Cal. Ct. App. 2d Dist. 30. July 2010), a sales representative refused to sign a confidentiality agreement which, among other things, „prevented them from all sales activities for 18 months after their departure or termination“. Soon after, Silguero was fired by her employer and hired by her competitor Creteguard. After his former employer informed Creteguard of the deal, Creteguard fired Silguero out of „respect and understanding for his industry colleagues,“ despite his belief that the non-compete obligations were unenforceable in California.
Silguero then filed a lawsuit against Creteguard and his former employer. Christopher Ghazarian, general counsel for web hosting company DreamHost, said: „The most important question a business owner can ask is: Why do we need a non-compete clause in the first place?“ „A total ban on most non-compete obligations, even for senior managers and other key employees. further impede employers` ability to protect confidential information and valuable trade secrets. Much of this information can be transferred to a competitor with an employee, even without transferring paper documents or electronic files,“ Sullivan said. Leiza Dolghih is a partner and co-chair of the trade secrets and non-competition practice at the law firm Lewis Brisbois. She said the proposed ban, „if it happens, will have a huge impact on the ability of small and medium-sized businesses to protect their trade secrets. Ghazarian: „Employees can generally negotiate stronger compensation due to the restrictions imposed by non-compete obligations. It`s possible that a ban on non-competition creates incentives for employees, especially if an employer thinks their new executive recruit can pack up and leave within months of learning valuable secrets from their current company. „You can continue to enter into initiative or confidentiality agreements.“ „In California, non-compete rules are not allowed and there`s nothing stopping Apple employees from working at Samsung,“ said Robert Milligan, a partner at Los Angeles law firm Seyfarth Shaw. .