Please join our presentation to learn about recent developments in the law surrounding non-compete agreements, as well as proposed federal and state legislation that may be on the horizon. We will also address what steps employers may take now to adapt to this ever-changing area of the law.

1. Developments in Non-Compete Law
and What to Expect Ahead
Presented by:
Eric Johnson and Nicole Simmons
August 21, 2019
Presentation UPDATED August 21, 2019

2. Agenda
 Overview of Restrictive Covenants
 Drafting Considerations to Maximize
Enforceability (i.e., Jurisdiction, Consideration, and
Reasonableness)
 A Look Ahead
1NS

3. Types of Restrictive Covenants
•Confidentiality agreements
•Non-compete agreements
•Non-solicitation / "No Raiding" agreements
•Anti-piracy / "Hands Off" agreements
•Common Law and Statutory Protections
2NS

4. "No Raiding" Clauses
• Prevent soliciting or enticing former co-workers to leave
• Generally upheld
• Like non-compete clauses, subject to reasonable time and other
limitations
3NS

5. Non-Piracy Clauses
• Agreements between contracting companies not to hire each
other's employees
• Not enforceable in some states
• e.g., In Wisconsin, a no-hire provision in a contract between staffing
firm and nursing home clients was found invalid because it restricted
employees without their knowledge or consent.
• Arizona law (A.R.S.§ 23-1361) prohibits blacklisting agreements
amongst employers.
4NS

6. Common Drafting Problems
Not knowing your jurisdiction.
5NS

7. Spectrum of Legal Attitudes
•Treatment varies greatly from state to state (and
sometimes from judge to judge)
•In general: Viewed with disfavor as limiting competition
and employee mobility
• Caveat - most states treat anti-solicitation clauses under a looser
standard
•The acceptance of the "Blue Pencil" approach also varies
greatly
6NS

8. Spectrum of Legal Attitudes
• California, Oklahoma and North Dakota – outright bans non-competes.
• Utah – Mar. 22, 2019, adopted statute banning non-competes for
employees in broadcasting industry who earned below a set salary.
• Massachusetts – enacted legislation imposing new restrictions on non-
competes signed on or after October 1, 2018, including that employers must
pay half the employees salary or other compensation during duration that
employee is barred from competing.
• Delaware – favors employers and will enforce so long as they are reasonable.
In the context of stock awards, burden is on employee to prove unreasonable.
7NS

9. Spectrum of Legal Attitudes (cont.)
The "Blue Pencil" approach – some (but not all) courts
permit using this doctrine to delete overbroad restraints
while enforcing remaining restrictions so long as removing
it would not offend the central purpose of the agreement
8NS

10. Spectrum of Legal Attitudes (cont.)
Different shades of "blue" –
•Strict blue pencil rule (Arizona, Idaho, Indiana, Illinois, and North
Carolina)
•Liberal blue pencil rule (Alabama, Alaska, Colorado, Connecticut,
Delaware, Hawaii, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts,
Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey,
New York, Ohio, Oregon, Pennsylvania, South Dakota, Tennessee, Texas,
Washington, West Virginia, and Wyoming)
9NS

11. Spectrum of Legal Attitudes (cont.)
Oddball Jurisdictions:
• The California approach
• Void as a matter of public policy in the employment context
• Oklahoma – Non-competes also void by statute but modification permitted
of anti-solicitation clauses
• The Wisconsin approach
• Entirely void by statute if unreasonable and blue-penciling prohibited
• Virginia, Arkansas and Nebraska follow Wisconsin approach
• Other jurisdictions vary across the spectrum, and law is frequently
changing
10NS

12. Spectrum of Legal Attitudes (cont.)
Unsettled Jurisdictions:
• South Carolina considered and rejected allowing courts to
rewrite restrictive covenants, but it is unclear whether it
follows a strict blue pencil rule.
• D.C., Maryland, New Mexico and Rhode Island are unsettled.
11EJ

13. Even If Not Enforceable . . .
•Many employees will voluntarily comply to avoid risk and
cost of litigation – especially if there is a risk of having to
pay the employer’s attorneys fees (in terrorem effect).
•However, not effective where restrictions are clearly
unreasonable/overbroad and, thus, unenforceable.
12EJ

14. Avoid Common Drafting Problems
Thinking About How Much Protection
You Can Get Away With
vs.
How Much Protection You Need
13EJ

15. Key Questions in Any Non-Compete Litigation
1. Does the employer have a business interest that the
law views as sufficiently strong to justify imposing the
hardship of a non-compete on the ex-employee?
2. Are the restrictions in the clause – in terms of length,
territory and activities – necessary to protect the
employer's legitimate business interest?
14EJ

16. Common Factors in Determining Reasonableness
•Employer interest to be protected
•Duration
•Geographic scope
•Employee hardship
•Public interest
15EJ

17. Business Interests Legally Recognized
•Technical know-how
•Trade secrets
•Confidential information
•Customer relationships
•Goodwill
16EJ

18. Business Interests Legally Recognized (cont.)
•Detailed customer information
• Names of key contacts
• Ordering history
• Customer preferences and idiosyncrasies
•High-level strategic information
17EJ

19. Business Interests Not Recognized
•Motivating the employee to stay
•Recouping training costs
•Protecting an easily duplicated customer list
18EJ

20. Considerations in Selecting a Duration
• When protecting customer relationships, consider the length
of time necessary to rebuild the relationship.
• When replacing employee, consider time to rehire and get
employee up to speed.
• When protecting trade secrets or confidential information,
consider the amount of time it would take to replicate it and
how long information remains valuable.
• Also note: Some states require a temporal limit to be included
in confidentiality clauses. Wisconsin follows this rule.
• Tolling provisions.
19EJ

21. Considerations in Selecting a Duration (cont.)
• Approaches vary by state law:
• In Arizona and Wisconsin, two years is generally
considered maximum.
• In Florida, a restriction lasting six months or less is
presumed reasonable, and a restriction lasting more
than two years is presumed unreasonable.
20EJ

22. Tip:
When including a temporal limit in a
confidentiality clause, expressly state
what the contractual protection is
intended to be in addition to,
and not in lieu of, protections
under governing trade secrets.
21NS

23. Territory Restriction
Considerations:
• Generally, where an employee principally works
• Salespersons –
• Geographic territory versus "active account" list
• The accounts the company considers "active"
• Company account list versus personal account list
• Whether sales managers personally deal with accounts
• The access a sales manager has with detailed customer information or strategic
information
22NS

24. Territory Restriction
Considerations:
• Executives and Managers –
• Typically broader geographic scope provision, but limited activity restriction
appropriate
• Law frequently fails to address portability of information
23NS

25. Activities Restrictions
• Need to limit restrictions to the employer's legitimate interests
• Avoid overreaching in terms of products, services,
and customers covered
• The Janitor Effect - Courts will not enforce broad catch-all
restrictions effectively stating "you can’t
even be a janitor for a competitor"
• Avoid "substantially similar" language
24NS

26. Tip:
The reasonableness of a
covenant is generally judged
at the time of enforcement.
25NS

27. No Deal Without Consideration
• Offer of a new job is adequate consideration
• Ensure offer is explicit that execution of non-compete is a condition of hire
• Continuation of existing at-will employment: Is it adequate
consideration?
• In some states it may not be enough
• Arizona – still an open question
• Wisconsin Supreme Court recently held it can be, but employment must actually
continue for sufficient period, and you may need to fire those who refuse to sign
• Alternatively, post-employment execution can be tied to bonus
payment, promotion, salary increase, newly granted access to
confidential information, etc.
26NS

28. Common Enforcement Problems
Failing to advise a candidate that
an offer is conditioned upon their
execution of a restrictive covenant.
27NS

29. Other Drafting Considerations
• Drafting concerns when using multiple types of restrictions
• Assignment clause
• Beware of subsequent merger clauses
• Choice of law
• Forum selection clause
28NS

30. Other Drafting Considerations (cont.)
• Arbitration
• Deferred / bonus compensation as consideration
• Attorneys' fees
29NS

31. Non-Competes in Sale of Business
• Lower standard for enforceability -- not subject to exacting
scrutiny
• May be judicially modified/blue-penciled (even where not
otherwise permitted)
• Structuring the deal to maximize likelihood that the looser
sale-of-business standards will be used
• Same applies to non-competes offered in connection with stock
awards
30NS

32. Departing Employees
• At separation:
• Remind departing employees of
their obligations, including immediate
return of property.
• Ask about future plans.
31EJ
• Consider search of computer to determine whether
employee taking critical information.
• But, be careful to ensure meta-data not modified by the
way in which the search is conducted.

33. Departing Employees (cont.)
• If subsequent concern raised, consider cease and desist letter to
former employee
• Copy new employer putting on notice of employee's obligations
• Often back-and-forth to try to reach mutual agreement before litigation
32EJ

34. Hiring Employee Subject to a Non-Compete
• Ask candidates about any restrictions from former employer(s)
• Subject non-compete to legal review for enforceability to
determine risk
• Require return of (and advise candidate not to bring) former
employer's property (e.g., business docs, customer info, etc.)
• Require honesty with former employer
33EJ

35. Hiring Employee Subject To a Non-Compete (cont.)
• Consider limiting solicitation of customers of former employer
• Document that you jumped through hoops to properly avoid
violating any existing restrictive covenant
34EJ

36. What to Expect in the Near Future...
Courts and legislatures will continue to narrow the use of
restrictive covenants in 3 ways:
1. Treating all restrictive covenants under the strict scrutiny of non-
competes;
2. Enacting state legislation banning or greatly restricting use of non-
competes; and
3. Proposing and enacting federal legislation banning non-competes
nationwide.
35EJ

37. What to Expect in the Near Future... (cont.)
• States are treating non-solicitation provisions the same as non-
competes.
• California – Court in 2018 rejected reasonableness approach for non-solicitation
provisions for travel nurse recruiters who left their employer for a competitor.
• Wisconsin – Court in 2018 extended reach of highly restrictive non-compete statute
to non-solicitation clauses.
36EJ

38. What to Expect in the Near Future... (cont.)
• Other states seek to ban non-competes, or greatly limit their use
by setting wage, duration or industry limits:
• Washington – effective Jan. 1, 2020, non-competes are void where (1) employer fails to
disclose terms of the agreement in writing prior to accepting offer of employment;
(2) it is executed after start of employment; (3) employee's earnings are less than
$100k annually ($250k for independent contractors), as adjusted for inflation;
(4) employee is laid off, unless employer provided base salary for period of
enforcement; and (5) duration exceeds 18 months. Applies retroactively.
• Pennsylvania and Vermont – in Jan. 2019, bills were introduced to ban non-competes
(joining California, Oklahoma and North Dakota), except in the sale of business or
partnership context.
37EJ

39. What to Expect in the Near Future... (cont.)
• State trend to limit non-competes, cont.:
• Georgia and Texas – proposed legislation to ban non-competes in certain industries,
such as technology, and gas and oil, respectively. Texas passed and is effective 9/1/19.
• New York, Hawaii and Maine – proposed legislation banning non-competes for low-
wage employees, among other limitations. Maine passed and is effective 6/28/19.
• Connecticut, Florida, Indiana and Wyoming – proposed legislation to ban or limit
physician non-competes; Florida bill died and Wyoming bill was postponed indefinitely.
• Arkansas and Illinois – proposed outright bans, but Arkansas' legislation was placed on
the deferred list and Illinois' legislation did not survive.
• New Jersey – proposed legislation curbing employers' ability to enforce non-compete
agreements and other restrictive covenants – bill died but nearly identical bills were
introduced thereafter and are currently in committee review.
38EJ

40. What to Expect in the Near Future... (cont.)
• Federal legislation seeking to ban non-competes nationwide
• Workforce Mobility Act of 2018 – Introduced by Democratic U.S. Senators Warren,
Murphy and Wyden attempting to prohibit non-competes nationwide for
employers engaged in commerce or in the production of goods for commerce.
• Freedom to Compete Act – Bill introduced on February 18, 2019 by Florida
Senator Marco Rubio proposing to amend the Fair Labor Standards Act to
ban non-competes for all non-exempt workers. The act, if passed, would
apply retroactively.
• In March 2019, six U.S. Senators made a joint request for the Government
Accountability Office to investigate the impact of non-competes
on workers and the U.S. economy.
39EJ

41. Thank You
Questions?
40

42. Presenters
Eric Johnson, Partner
(602) 229-5425
eric.johnson@quarles.com
Nicole Simmons, Attorney
(602) 229-5323
nicole.simmons@quarles.com
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