Illinois Governor Signs New Non-Compete Bill

The Illinois General Assembly passed a major bill in May that significantly alters how and when employers can use restrictive covenants with Illinois employees.  Illinois Governor JB Pritzker signed the bill into law on August 13, 2021, and it will go into effect January 1, 2022.

We provided details and analysis on the new law here.  At a high level, the new law: (a) prohibits the use of non-compete agreements with employees paid less than $75,000 per year; (b) prohibits non-solicitation agreements for employees paid less than $45,000 per year; and (c) codifies the rule under Fifield and Enterprise Financial Group, Inc. v. Premier Dealer Services, Inc., 373 Ill. Dec. 379, 993 N.E. 2d 938 (Ill. App. Ct. 2013), requiring employers to provide employees with “at least two years or more of continued employment” as consideration for signing a restrictive covenant, if at-will employment alone (as opposed to some other “professional or financial benefits”) is the consideration for the agreement. The law also requires employers to advise employees in writing to seek attorney consultation and provide at least 14 calendar days to review the agreement before signing.

Illinois employers are encouraged to review their current restrictive covenant agreements and bring them into compliance before the January 1, 2022 effective date of the amendments.

Why We Signed a Joint Letter Urging Caution in Non-Compete Regulation

Earlier this month, President Joseph Biden issued an Executive Order encouraging the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

We joined more than 50 lawyers and paralegals around the country – all of us experienced restrictive covenant practitioners – in signing a joint letter urging the White House and the FTC to exercise caution in regulating non-compete agreements.

Drafted by our friend Russell Beck of Beck Reed Riden LLP, with input from us and some of the other signatories, the letter describes the long-recognized benefits of reasonable non-compete agreements and other restrictive covenants, particularly protecting valuable trade secrets from misappropriation. Indeed, non-compete agreements have been enforced as valid and reasonable in most states for hundreds of years. The letter also dispels common misconceptions about non-compete agreements, including the idea that all non-competes are necessarily abusive to employees.

While taking no position on whether the FTC legally can regulate this area of law, we suggest the FTC act judiciously, if at all. For example, rather than issuing a complete ban, the letter proposes the FTC consider prohibiting non-competes for low-wage workers only and require that employers give advance notice of non-compete provisions to employees before requiring them to agree. We believe that more modest regulations can be designed to balance competing interests of employers and employees, especially in light of the state-specific legislation, common law history, and the very capable job courts have done to enforce what is reasonable under the facts of the cases presented.

We will continue to monitor these regulatory developments. In the meantime, employers should consider taking proactive steps to protect their interests. Attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to advise on these issues.

D.C. Budget Bill Includes April 1, 2022 Applicability Date for Non-Compete Ban

The District of Columbia passed one of the nation’s most stringent regulations on covenants not to compete earlier this year. Except in very limited circumstances, the law states employers may not require or request employees sign an agreement that includes a non-compete provision, and employers cannot have a workplace policy that prohibits an employee from “(1) [b]eing employed by another person; (2) [p]erforming work or providing services for pay for another person; or (3) [o]perating the[ir] own business.”

As we noted at the time, although the law was passed and signed by Mayor Muriel Bowser, its restrictions would not become “applicable” until the fiscal effects of the law were included in an approved budget and financial plan.

On July 20, 2021, the D.C. Council had a first reading on the Fiscal Year 2022 Budget Support Act of 2021. Buried in this wall of text is a provision that would amend Section 302 of the non-compete act to include an “applicability date” of April 1, 2022.

So, April 1, 2022 is the date we are eyeing for the D.C. non-compete ban to “apply.” Of course, things could change, but this is as strong an indicator as we have seen. We will continue to monitor these developments and provide an update once the “applicability date” for the D.C. non-compete ban is confirmed.

In the meantime, employers should act now to ensure they do not run afoul of the D.C. non-compete ban once it does become applicable. Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to advise on these issues.

President Biden Issues Executive Order Calling on FTC to “Curtail Unfair Use” of Non-Competes and Other Restrictive Covenants

There have been whispers of federal regulation of non-compete agreements for years. Multiple bipartisan bills aiming to ban non-competes have fallen to the wayside without traction. The Federal Trade Commission hosted a workshop in January 2020 (attended by our own Erik Winton) “to examine whether there is a sufficient legal basis and empirical economic support” to restrict non-competes.

Today, President Biden took another step toward federal regulation by issuing a sweeping Executive Order that, among many other competition-focused objectives, encourages the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

Although the White House Fact Sheet and most media reports characterize this portion of the Executive Order only with respect to “non-compete agreements,” the actual text goes further. It applies to non-compete provisions “and other clauses or agreements that may unfairly limit worker mobility.” This language arguably may include other restrictive covenants that are currently enforceable in most jurisdictions, such as customer and employee non-solicitation provisions, no-hire provisions, and non-servicing provisions.

To be clear, the Executive Order does not change the law of restrictive covenants by itself. Much remains to be done before a ban or limitation on such agreements by the FTC becomes a reality.

Again, the FTC already conducted a thorough examination of non-competes 18 months ago, and so far, nothing has come of it. Crucially, the FTC examined not only “why” it should consider regulating non-competes (a question hotly debated with ample evidence on both sides, despite the White House’s citation only to pro-regulation evidence), but also “how” the FTC could act.

Several panelists questioned whether the FTC could regulate this area of law through rulemaking even if it were inclined to do so. However, the Executive Order specifically encourages the FTC to “exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act” to regulate restrictive covenants. This process may require several steps, including publishing a detailed and specific notice of any proposed rulemaking, the draft text of the rule, and the reason for the proposed rule. Rulemaking potentially could be a years-long process.

Even if the FTC engages in rulemaking, it remains unclear what level of regulation it may pursue. Note the Executive Order encourages regulation only of “the unfair use” of non-compete clauses and other restrictive covenants. This choice of language might suggest that not all use of such agreements is “unfair,” in President Biden’s view? The ultimate scope of any rulemaking remains to be seen.

The Executive Order raises many questions and does not cause any immediate changes to restrictive covenant law. Even so, employers should start thinking about how to protect their business interests if the FTC were to ban some or all non-competition agreements or other restrictive covenants.

As many readers know, using restrictive covenants represents just one of several business protection strategies. Companies should discuss alternative strategies, policies, and best practices with their counsel. Attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to advise on these issues.

New Georgia Decision Clarifies Scope of Computer Trespass Statute

Just as the United States Supreme Court recently limited the reach of the federal Computer Fraud and Abuse Act (“CFAA”) in Van Buren v. United States, the Georgia Supreme Court has now reined in the Georgia state law counterpart to the CFAA.

Background

In Kinslow v. State, No. S20G1001 (June 21, 2021), the defendant was an IT employee of the City of Norcross. The defendant allegedly altered the City’s computer network settings to cause his boss’s incoming emails to be copied and forwarded to the defendant’s personal email account. The jury found the defendant guilty of state-law computer trespass, and the defendant appealed.

The Georgia computer trespass statute defines the offense, in part, as “us[ing] a computer or computer network with knowledge that such use is without authority and with the intention of . . . [o]bstructing, interrupting, or in any way interfering with the use of a computer program or data.” OCGA § 16-9-93(b)(2) (emphasis added).

No “Obstruction” or “Interference” in Copying Emails

There was no question the defendant in Kinslow lacked authorization to access and forward his boss’s emails. But the majority concluded that the evidence at trial could not prove the defendant acted “with the intention of obstructing or interfering with the use of data.”

Relying on dictionary definitions of the words “obstruct” and “interfere,” and applying the canons of construction, the court interpreted the statute as requiring proof that the defendant “hindered” the use of data in some way. According to the court, the evidence showed, at most, the defendant enabled a copy of computer data to flow to another recipient. Because “[t]here [was] no evidence that [the defendant] by his actions hindered the flow of data to any intended recipient or otherwise hindered the use of data,” the court overturned the conviction for computer trespass under the Georgia statute.

The majority ruling drew a sharp dissent. The dissent would have held the defendant’s actions to “manipulate” the data stream and “intermeddle” data intended to go to others satisfied the “in any way interfering” provision of the statute. The dissent reasoned, “[T]respass does not require the theft of data from its intended recipient—it requires only that one accesses that data from a place one is not authorized to be.” (This interpretation would have tracked the CFAA, which prohibits merely “obtain[ing]” information without authorization.)

Takeaways

The dissent warned that this decision “educates wrongdoers that they are better off from both a detection standpoint and from prosecution as a matter of law if they simply copy data rather than block its delivery.” At least for application of the Georgia computer trespass statute, that point is hard to argue. That said, the defendant’s alleged conduct here might have violated a host of other laws, including the CFAA and possibly trade secret laws.

Employers should keep in mind that many states have computer trespass statutes that do not necessarily rise and fall with the CFAA. Some may be broader, and some, like Georgia’s, may be narrower. Whenever an employee accesses information to which the employee lacks authorization, or improperly uses information to which access is authorized, employers should work with counsel to carefully analyze the possible legal implication of such conduct.

Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to assist in these situations.

 

Ohio Decision Highlights Importance of Business Protection Agreements with Independent Contractors

Just as the distinction between an individual’s status as independent contractor versus employee can have serious ramifications for wage, tax, and other legal issues, the same can be true for claims relating to unfair competition. As a recent decision from the Court of Appeals of Ohio highlights, employers must be especially diligent protecting against unfair competition when engaging independent contractors to carry out their business.

Factual Background

In Key Realty, LTD. v. Hall, 2021-Ohio-1868, plaintiff Key Realty engaged defendant Michael Hall as an independent contractor to manage some of the firm’s real estate brokers. By the time he left in 2019, Hall had multiple managers and brokers reporting to him, who supervised about 380 real estate agents.

In 2012, Key Realty had Hall sign a Non-Competition, Non-Solicitation, and Confidentiality Agreement (“Agreement”). The Agreement stated the parties made it “in consideration of the mutual promises contained herein, and for other good and valuable consideration, including ________.” Yet the parties never filled in the blank space.

Before departing Key Realty, Hall formed a new real estate brokerage named Red 1. When he left, Hall shut Key Realty out of the Facebook group he used to communicate with Key Realty’s agents. He also terminated Key Realty’s access to the Google drive and email accounts he used while working for Key Realty, “blocking access to any documents that he created while performing work for Key Realty.” Key Realty presented evidence that it lost around 200 agents in the Columbus area after Hall’s departure.

Ownership of Social Media Accounts and Digital Property

Hall claimed that because he was an independent contractor operating through a separately owned LLC, the Facebook account, Google drive, and email accounts he used while in service of Key Realty belonged to him. The trial court granted summary judgment to the defendants on Key Realty’s claims for conversion and unauthorized use of computer property. Although at first affirmed on appeal, the appellate court later reversed upon Key Realty’s motion for reconsideration.

On reconsideration, the appellate court determined that the language of the Agreement created a genuine issue of material fact over ownership, because it specified that “all books, records, files, forms, reports, accounts and documents relating in any manner to [Key Realty’s] business or customers,” were the exclusive property of Key Realty.

While Hall may prevail on this issue at trial, there is no doubt the language of the Agreement is critical for Key Realty. Had Key Realty failed to enter into the Agreement with Hall, or to include this property ownership provision, its defenses to Hall’s claim of ownership over the valuable digital accounts and property Hall developed while engaged by Key Realty would have been significantly weakened. Hall may not have been able to claim ownership had he been an employee, rather than an independent contractor, making the Agreement even more important for Key Realty.

Consideration for the Agreement

The initial appellate court found the Agreement unenforceable because the parties left a line blank where they should have listed the consideration. The court also reasoned that, while continued employment can constitute consideration for restrictive covenants, continued status as an independent contractor could not.

On reconsideration, the appellate court found that Hall’s continued engagement with no specific end-date created something equivalent to “employment-at-will,” even though the relationship was employer-independent contractor. Because the parties continued their at-will relationship for six years after executing the Agreement, this served as sufficient consideration.

The blank space where the parties should have identified the consideration did not alter this result, because the Agreement elsewhere stated that, in exchange for the restrictive covenants, Hall would “gain valuable information and insights on the lines of business in which [Key Realty] is engaged; access to [Key Realty’s] confidential and proprietary information; and exposure to its existing and potential business opportunities.” This, according to the appellate court on reconsideration, was a “bargained-for benefit and detriment, fully satisfying the general definition of consideration in Ohio.”

Conclusion

Although the Key Realty court ultimately reversed summary judgment for the defendants on reconsideration, Key Realty must still grapple with these issues on its way to trial. This case serves as an excellent reminder for employers to think carefully about the distinction between independent contractors and employees when seeking to protect their business interests. A well-written, clear contract is the best way to confirm whether the employer or independent contractor owns the work product generated during the engagement. As always, parties to restrictive covenants and other agreements should make any variables in a contract (such as consideration) explicit before signing. Continued engagement of an independent contractor, standing alone, likely would not constitute sufficient consideration in all jurisdictions.

Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to assist with any questions.

Jackson Lewis Law Clerk Jackson Biesecker contributed to this post. 

New Nevada Law Further Regulates Restrictive Covenants

Important amendments to Nevada’s non-compete statute, NRS 613.195, recently were enacted when Nevada Governor Steve Sisolak signed into law Assembly Bill 47. Because A.B. 47 does not have a specified effective date, it will go into effect on October 1, 2021, pursuant to Nevada law.

Ban on Non-Competes for Hourly Employees

First, A.B. 47 bans non-compete covenants for employees who are “paid solely on an hourly wage basis, exclusive of any tips or gratuities.” The law does not appear to affect covenants for hourly employees who also receive bonuses, profit sharing, or commissions from the employer.

If the employer or employee files a lawsuit to enforce or challenge the non-compete covenant and the court finds the covenant is unlawful because it “applies to [an employee paid solely on an hourly wage basis],” the court is required to award the employee their reasonable attorneys’ fees and costs.

Ban on Actions to Enforce or Impose Certain Customer Servicing Restrictions

NRS 613.195 already prohibited covenants that restricted a former employee from providing services to a former customer or client if: (a) “the former employee did not solicit the former customer or client”; (b) “the customer or client voluntarily chose to leave and seek services from the former employee”; and (c) “the former employee is otherwise complying with the limitations in the [non-compete] covenant as to time, geographical area and scope of activity to be restrained[.]”

The new law now makes clear that an employer may not bring an action seeking to restrict any of these activities, even if the agreement itself does not explicitly do so.

If the employer or employee files a lawsuit regarding the former employee’s covenants and the court finds the employer has wrongfully restricted or attempted to restrict the former employee from providing services to customers or clients in the manner described above, the court is once again required to award the employee their reasonable attorneys’ fees and costs.

“Blue Pencil” In Employee-Initiated Challenges

NRS 608.195 previously required Nevada judges to revise, or “blue pencil,” unreasonable non-compete agreements. If the agreement was supported by valuable consideration but was unreasonable as to time, geography, or activity restricted, the judge was required to revise the agreement such that its restraint was no greater than necessary for the protection of the employer. However, such judicial revision was only required in actions brought by employers to enforce such agreements. In actions brought by employees to invalidate non-compete agreements, judges were not required to engage in the “blue pencil” process.

The new law extends the required judicial reformation process to actions brought by employees challenging non-compete covenants. This is one change to the law that is beneficial to employers.

The exact parameters of Nevada’s new requirements for restrictive covenant agreements will be fleshed out through future litigation and court decisions, which Jackson Lewis will monitor. Nonetheless, the significance of these amendments requires employers to give careful consideration in the drafting of non-compete covenants at the outset. Further, while A.B. 47 does not state whether its provisions are applicable retroactively to agreements that already have been executed, all employers should review their existing non-compete agreements with the new law in mind.

Please contact your Jackson Lewis attorney to discuss these developments and your specific organizational needs.

 

Illinois Passes Bill to Further Limit Restrictive Covenants for Employees

After extensive negotiations between interest groups representing both employees and businesses, the Illinois General Assembly passed a major bill on May 31, 2021, that further limits and clarifies the circumstances in which restrictive covenants can be enforced against Illinois employees. Illinois Governor J. B. Pritzker is expected to sign the bill into law.

We provide a detailed analysis of the new law and its impact for Illinois employers in our article here. The new law goes into effect January 1, 2022, and applies to agreements entered on or after that date.

At a high level, the new law imposes several major changes:

  1. Non-competes will be invalid for employees earning less than $75,000 per year, with the minimum increasing over time.
  2. Non-solicitation covenants (defined to include non-solicitation of employees and actual or prospective customers, vendors, and suppliers) will be invalid for employees earning less than $45,000 per year, with the minimum increasing over time. This is significant. Other states that recently regulated restrictive covenants generally did not expressly affect non-solicitation provisions.
  3. Non-competes and non-solicitation covenants will be void for employees furloughed or terminated due to business circumstances or governmental orders related to COVID-19 or similar circumstances, with a limited exception for non-competes enforced through payment of base salary in the enforcement period.
  4. Non-competes (but not non-solicitation covenants) will be prohibited for employees covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act or individuals employed in construction, subject to limited exceptions.
  5. The well-known Fifield standard under Illinois law is now codified in the law.
  6. Employees must be advised in writing to seek attorney consultation and provided at least 14 calendar days to review a restrictive covenant before signing.
  7. The Illinois attorney general will have the right to initiate investigations and initiate or intervene in a civil action to compel compliance. The attorney general may request a court to impose civil penalties not to exceed $5,000 for each violation, or $10,000 for each repeat violation within a 5-year period.

In short, this is a major overhaul of restrictive covenant law in one of the nation’s most heavily populated states. We will continue to analyze these issues and explore their practical impact for employers.

“So” What? SCOTUS Adopts Narrow Interpretation of CFAA

It’s not every day the U.S. Supreme Court issues an opinion relevant to this blog, so we are understandably excited when it does.

In a landmark decision, the Court has ruled that the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030 et seq., does not prohibit improper use of computer information that an individual was authorized to access. Rather, the law prohibits obtaining information from areas of a computer, such as files, folders, or databases, that are outside the limits of the individual’s authorized access. Van Buren v. United States, No. 19-783 (June 3, 2021).

The Court reached its conclusion through an exercise in statutory construction fit for a law school exam, dissecting competing interpretations of the word “so.” You can read more about the Court’s interpretive analysis and the implications for employers in our article here.

The upshot is that this decision will have a significant impact on “departing employee” cases. Improper use of information that an employee was authorized to access (a common fact pattern) will not trigger CFAA liability, removing one pathway into federal court. Without the CFAA’s protection for such conduct, employers have even greater reason to protect their information from misuse through enforceable contracts and thoughtful security protocols, among other methods. And although no longer in violation of the CFAA, improper acquisition or use of information to which an employee has authorized access may still trigger liability under a host of other laws, including the federal Defend Trade Secrets Act.

Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group and the Privacy, Data and Cybersecurity practice group are available to assist employers in protecting their assets from improper acquisition and use. We will continue to monitor the aftereffects of Van Buren in the lower courts.

North Carolina Court Upholds 10-Year Restrictive Covenant Between Employer and Former Employee

When one thinks of a “reasonable” temporal scope for a restrictive covenant between employer and employee, usually that period is measured in months or years, not decades. But as a recent North Carolina decision reminds us, context is everything, and a 10-year restriction can be enforceable in the right circumstances.

In KNC Techs., LLC v. Tutton, 2021 NCBC LEXIS 38 (N.C. Super. Ct. Apr. 8, 2021), Eric Tutton (“Tutton”) entered into a Non-Compete Agreement during his employment with KNC Technologies, LLC (“KNC”). Around his resignation from KNC in 2013, Tutton allegedly violated the Non-Compete Agreement and misappropriated KNC’s confidential information, leading KNC to sue Tutton (“Tutton I”).

KNC and Tutton entered into a negotiated Settlement Agreement resolving Tutton I that prohibited Tutton from “solicit[ing], contact[ing], and/or mak[ing] sales” for 10 years to “[KNC] customers” and nine specifically named KNC suppliers. The trial court approved and entered a consent order reflecting the terms of the Settlement Agreement, thus ending the lawsuit.

Roughly a year after entry of the Settlement Agreement and consent order, Tutton allegedly formed a competing company and later violated the restrictive covenants in the Settlement Agreement. KNC sued Tutton again, this time in the North Carolina Business Court[1] (“Tutton II”), and Tutton challenged the Settlement Agreement as being unreasonable and unenforceable under the well-developed North Carolina case law on restrictive covenants between employers and employees. Indeed, North Carolina courts usually view five years as the outer limit of enforceable restrictive covenants between employer and employee, and even that period is enforceable only in “extreme conditions.” Hartman v. W.H. Odell & Assocs., 117 N.C. App. 307, 315, 450 S.E.2d 912, 918 (1994).

The Business Court rejected Tutton’s challenge and denied his early motion to dismiss KNC’s claim for breach of the Settlement Agreement. See KNC Techs., LLC v. Tutton, 2019 NCBC LEXIS 72 (N.C. Super. Ct. Oct. 9, 2019). Even though KNC and Tutton did have an employment relationship at one point, the Court declined to analyze the Settlement Agreement as a restrictive covenant between employer and employee. The Court noted there are other contexts in which restrictive covenants are routinely upheld (such as with the sale of a business, or between franchisors and franchisees), and the facts alleged “did not fit squarely under the analysis applied to restrictive covenants between employer and employee or buyer and seller, but instead call for a more situation-specific approach.” Id. at ¶ 29.

Under this “situation-specific approach,” the Court concluded the 10-year restriction in the Settlement Agreement was reasonable and enforceable. The facts supporting the Court’s conclusion were: (1) Tutton admittedly violated the original Non-Compete Agreement; (2) Tutton, while represented by counsel, settled Tutton I by freely agreeing to less onerous restrictions than a true covenant not to compete; and (3) the Settlement Agreement did “nothing more than protect KNC’s business interests, which Tutton [had] already demonstrated a propensity to ignore.” Id. at ¶ 31.

On April 8, 2021, on summary judgment after the parties conducted discovery, the Court continued to hold enforceable the 10-year restriction, at least for KNC’s suppliers. Tutton II, 2021 NCBC LEXIS 38, at ¶¶ 56-62. Although the 10-year supplier restriction was held enforceable, the language imposing the restriction itself was deemed ambiguous, and trial will be necessary to establish potential breach. Id. at ¶¶ 63-66. The Court did grant summary judgment to Tutton on the customer-focused restriction, because it prohibited Tutton from contacting too broad a universe of individuals and entities. Notably, the Court reiterated that the 10-year temporal scope of the customer restriction was reasonable under the specific facts before it. Id. at ¶ 47.

This case raises important considerations for employers when negotiating restrictive covenants outside the traditional employment context. Particularly where the employee is represented by counsel and the parties are negotiating settlement, courts may be more willing to enforce broader restrictions. This is also an important reminder that, even in the age of increased regulation and scrutiny, lengthy restrictive covenants may still be enforced.

Jackson Lewis attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to advise on these strategic considerations.

[1] The North Carolina Business Court is a special forum of the state trial division that only hears cases involving complex business disputes.

 

 

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