BRR 50-State Noncompete Chart Updated

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World MapThe BRR 50 State Noncompete Chart has been substantially updated to reflect numerous developments in statutory or case law since the last draft, as well as clarifications of existing laws. Click here to get the latest version.

Please note that the chart has been revised through yesterday, August 23.

Arkansas Strengthened Its Noncompete Law

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“Arkansas in United States” by TUBS – This vector image includes elements that have been taken or adapted from: Usa edcp location map.svg (by Uwe Dedering); USA Hawaii location map.svg (by NordNordWest); Canada location map.svg (by Yug). Licensed under CC BY-SA 3.0 via Wikimedia Commons: https://commons.wikimedia.org/wiki/File:Arkansas_in_United_States.svg#/media/File:Arkansas_in_United_States.svg.

As of Thursday, August 6, Arkansas noncompete law was statutorily modified by the addition of Ark. Code 4-70-207.

With all of the talk about states (like New Hampshire, Hawaii, Massachusetts, Michigan, and Oregon) that have imposed, or are considering imposing, limits (up to an out-right ban) on noncompetes in the employer-employee context, Arkansas has joined the ranks of states (like Alabama, Georgia, Texas, and Wisconsin) that have make it easier to enforce noncompetes.

Under the new law, noncompetes in Arkansas must be limited with respect to time and scope in a manner that is not greater than necessary to defend the protectable business interest of the employer (see below). The lack of a geographic limit does not render the agreement unenforceable, provided that the time and scope limits appropriately limit the restriction. Factors to consider include the nature of the employer’s business interest; the geographic scope, including whether a geographic limit is feasible; whether the restriction is limited to specific group of customers or others; and the nature of the employer’s business. In addition, a two-year restriction is presumptively reasonable unless clearly demonstrated otherwise.

Legitimate business interests that may be protected include trade secrets; intellectual property; customer lists; goodwill with customers; knowledge of business practices; methods; profit margins; costs; other confidential information (that is confidential, proprietary, and increases in value from not being known by a competitor); training and education; other valuable employer data (if provided to employee and an employer would reasonably seek to protect or safeguard from a competitor in the interest of fairness).

This will be included in the next update of our 50-state noncompete chart, which will be coming soon!

Proposed Federal Noncompete Law

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Federal Noncompete Bill - screen shotNoncompete law is a creature of state regulation. As such, no surprise, we have 50 variations (really 51, when you factor in DC – albeit 3 states (California, Oklahoma, and North Dakota) prohibit employee noncompetes altogether, so it’s more like 48 variations). See BRR’s 50-state summary chart. (Note that the chart is in the process of being updated to reflect a variety of developments since its last update.)

Well, we may be on the verge of a 51st variation (or 49th, if you’re keeping accurate count).

Specifically, despite the state-based nature of these laws, yesterday (June 3), U.S. Senators Al Franken (D-Minn.) and Chris Murphy (D-Conn.) (with cosponsors Senators Elizabeth Warren (D-Mass.) and Richard Blumenthal (D-Conn.)) proposed federal legislation to limit the use of noncompetes for low-wage employees for companies involved in interstate commerce. (Does anyone know of any companies not involved in interstate commerce at this point?)

The Bill is entitled the ‘‘Mobility and Opportunity for Vulnerable Employees Act’’ (or the ‘‘MOVE Act’’) and prohibits the use of covenants not to compete (defined in the bill) for “low-wage employees,” i.e., employees earning the greater of (subject to inflation) $15 per hour or the applicable state or local minimum wage rate or $31,200 per year, but excluding any salaried employee earning (subject to inflation) more than $5,000/month for 2 consecutive months. (It also requires notice of the Act in a conspicuous place in the workplace and is clear that it applies only to agreements entered after the enactment of the Act.)

Thresholds, notice, and timing requirements aside, the Bill is somewhat unclear on its scope. Specifically, it is unclear whether it applies only to true noncompetes (i.e., agreements that restrict someone from working for a particular category of employer, in a particular role, in a particular area, for a particular period) or to all restrictive covenants (including nonsolicitation agreements, no-poach/no-raid agreements, nondisclosure agreements, etc.)

In this regard, the language (in section 2(2) of the Bill) defining a covenant not to compete states as follows:

“an agreement (A) between an employee and employer that restricts such employee from performing

(i)  any work for another employer for a specified period of time;

(ii)  any work in a specified geographical area; or

(iii)  work for another employer that is similar to such employee’s work for the employer included as a party to the agreement . . . .”

So, for example, is a restriction on the employee soliciting (or providing services to) certain customers a restriction on the employee “from performing . . . any work for another employer” or (perhaps less likely) “from performing . . . work . . . that is similar to such employee’s work for the [prior] employer”? The answer is, at this time, unclear.

The Secretary of Labor is charged with enforcement of the Act and may impose civil fines up to $5,000 for each noncompete violation for each affected employee and $5,000 for failure to post the appropriate notice.

We will keep you posted on the developments.

Noncompete Studies Suggest Noncompete Enforcement Improves Training and Quality of Startups

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Noncompete and Trade Secret Cases Survey Graph 20150117More and more studies are being conducted about the impact of noncompetes on the economy, including in particular on startups, employee mobility, and innovation.

Two relatively recent studies, suggest some (perhaps) surprising results.

The first, Training the Enemy? Firm-Sponsored Training and the Enforcement of Covenants Not to Compete (January 25, 2015), by University of Illinois professor, Evan Starr, suggests that companies in states that permit stronger enforcement of noncompete agreements tend to provide more training to their employees.

The second, Enforcing Covenants Not to Compete: The Life-Cycle Impact on New Firms (June 15, 2014), by University of Illinois professor, Evan Starr, Whitman School of Management (Syracuse University) professor, Natarajan Balasubramanian, and UCLA Anderson School of Management professor, Mariko Sakakibara, suggests that states that permit stronger enforcement of noncompete agreements tend to have fewer – but better (higher-quality ideas and more likely to survive) – startups.

Tip of the hat to the Washington Post for its story today, The rise of the non-compete agreement, from tech workers to sandwich makers, which included a discussion about a working paper, Noncompetes in the U.S. Labor Force (as of February 18, 2015), from Professor Starr, University of Michigan’s Ross School of Business professor, Norman Bishara, and University of Michigan Law School professor, James J. (“JJ”) Prescott.

2014 Trade Secrets and Noncompetes Year in Review

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Document8In anticpation of speaking at the Boston Bar Association’s 15th Annual Intellectual Property Year in Review earlier this month, I prepared a paper discussing a number of the developments in trade secrets law and noncompete law around the country in 2014. Ultimately, I was unable to make it to speak at the event, but my partner, Steve Riden, covered for me – for which I am grateful!

The topics covered in the paper are as follows:

The paper is available here.

Massachusetts Bills to Ban Noncompetes and Adopt UTSA in the New Legislative Session (2015-2016)

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IMG_0017Several bills concerning trade secrets and noncompetes were filed this week in the Massachusetts legislature.

On trade secrets side, the following bills were filed: H.2569 by Representatives Bradley Jones and Elizabeth Poirier; H.2157 by Representative Garrett Bradley; and S.334 by Senator Jason Lewis.

The following bills were filed on the noncompete side: H.2332 by Representative Lori Ehrlich and an identical bill in the senate (S.809) by Senator Will Brownsberger; H.730 by Representative Angelo Puppolo; H.2157 by Representative Garrett Bradley; H.709 by Representative Sheila Harrington; and S.334 by Senator Jason Lewis.

The bills (all of which are available through the above links) are summarized as follows:

The various trade secrets bills filed by Senator Jason Lewis and Representatives Brad Jones, Elizabeth Poirer, and Garrett Bradley are all essentially last session’s version of the bill to adopt the Uniform Trade Secrets Act with some very minor (nonsubstantive) changes. As I explained here, this version the UTSA would substantially weaken Massachusetts trade secrets law. However, Steve Chow‘s version, which I worked on with Steve to address these concerns, was filed by Steve Chow as a Uniform Law Commissioner in the fall and remains up for consideration.

The noncompete bills all seek to ban noncompetes, albeit using different language. Representatives Harrington and Puppolo bills track California’s Business and Professions Code sections 16600 to 16602.5 (with a little restructuring). It is important to note that while they specifically exempt nondisclosure agreements, they could have the effect of banning nonsolicitation agreements. (That’s how the same language has been interpreted in California.)

The other approaches to banning noncompetes use similar language to that proposed last year by Governor Patrick (which I had helped to draft). The full language, which is set out in Senator Brownsberger’s and Representative Ehrlich’s bill, is reproduced below.

However, several aspects of this version are important to note. First, if passed, this bill would not apply to other types of restrictive covenants, such as nondisclosure agreements, nonsolicitation agreements, or no raid agreements. Nor does the bill apply retroactively; it prohibits only agreements entered into after the bill and passed and the law becomes effective. (Senator Jason Lew’s bill, while nearly identical, would apply retroactively, i.e., to existing agreements. Similarly, Representative Bradley’s bill, which uses some but not all of the same language, also applies retroactively; however, Representative Bradley’s bill could also be interpreted to ban all other restrictive covenants – not just noncompetes.)

As a side note, last legislative session, there was a fair amount of discussion about including language expressly permitting what has become referred to as a “springing noncompete.” The concept was that while noncompete agreements would be banned, a court may nevertheless prohibit the former employee from working for the new employer as a remedy for a breach of another restrictive covenant (e.g., a nondisclosure agreement or nonsolicitation agreement). Although not expressly provided for in the current bills, that relief may still be available, as the bill would ban only “agreements” and leaves unaffected a court’s broad equitable powers.

Given the completeness of the Brownsberger/Ehrlich bill (and my involvement with its drafting), I have provided its full text here.

An Act relative to the judicial enforcement of noncompetition agreements.

            Be it enacted by the Senate and House of Representatives in General Court assembled, and by the authority of the same, as follows:

Chapter 149 of the General Laws of Massachusetts shall be amended by inserting the following as Section 19D:

Section 19D. Noncompetition Agreements

Any written or oral agreement arising out of an employment or independent contractor relationship that prohibits, impairs, restrains, restricts, or places any condition on a person’s ability to seek, engage in, or accept any type of employment or independent contractor work, for any period of time after an employment or independent contractor relationship has ended, shall, to that extent, be void and unenforceable. This section does not render void or unenforceable the remainder of the agreement containing the unenforceable noncompetition agreement, nor does it preclude the imposition by a court, through a temporary restraining order, preliminary injunction, permanent injunction, or otherwise, of a noncompetition restriction as a provisional or permanent remedy for a breach of another contractual obligation or violation of a statutory or common law duty. Nor shall this section affect (i) covenants not to solicit or hire employees or independent contractors of the employer; (ii) covenants not to solicit or transact business with customers, clients, or vendors of the employer; (iii) nondisclosure agreements; (iv) noncompetition agreements made in connection with the sale of a business or partnership or substantially all of the assets of a business, when the party restricted by the noncompetition agreement is an owner of, or partner with, at least a ten percent interest of the business who received significant consideration for the sale; (v) noncompetition agreements outside of an employment or independent contractor relationship; (vi) forfeiture agreements; or (vii) agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.

This section shall apply to all contracts and agreements executed after the effective date of this act.

Trade Secret and Noncompete Survey – National Case Graph 2015

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Noncompete and Trade Secret Cases Survey Graph 20150117As regular readers of this blog know, several years ago, I became curious to see how many reported trade secret / noncompete decisions were issued each year in all federal and state courts around the country. So, I did a “back of the envelope” calculation. I have performed similar calculations every year since.

The graph shows three things: (1) the blue bars show all reported noncompete decisions; (2) the red bars show all reported trade secrets decisions; and (3) the yellow bars show all decisions involving noncompetes or trade secrets or both.

I should note that  each time I’ve run the queries, the results for each year have varied slightly (inching up over time), which I attribute to Westlaw’s addition of cases over time. Consistent with that, the older the data, the less it moves. Indeed, the oldest data didn’t change at all.

The other thing worth noting is that every time I’ve run this inquiry at the beginning of the year (as is the case this time), the most recent year has been way underreported. I suspect that it has something to do with how Westlaw updates its database. I will very likely run my search again later in the year, and, if history is any predictor, the 2014 numbers will be significantly higher. We will see!

Perhaps most telling is that while noncompete litigation has been relatively static, trade secrets litigation has increased every year, with the sole exception of a slight dip in 2012.

If you’d like to take a closer look at the numbers, you can click the image above.

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