North Carolina: On March 18, the Supreme Court of North Carolina, in Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, reiterated its long-standing “strict blue pencil” approach “under which a court cannot rewrite a faulty covenant not to compete but may enforce divisible and reasonable portions of the covenant while striking the unenforceable portions.” The court stated its rationale as follows:
Allowing litigants to assign to the court their drafting duties as parties to a contract would put the court in the role of scrivener, making judges postulate new terms that the court hopes the parties would have agreed to be reasonable at the time the covenant was executed or would find reasonable after the court rewrote the limitation. We see nothing but mischief in allowing such a procedure.
On March 10, in R.J. O’Brien & Assoc., LLC v. Williamson, another United States District Court judge in Illinois (Judge Robert Gettleman) weighed in on the controversial Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013). Fifield (which the Illinois Supreme Court refused to accept on appeal), you may recall, is the Appellate Court of Illinois for the First District, First Division decision that held that, if a new job (i.e., employment) is the purported consideration for a restrictive covenant, the employment must last at least two years to suffice – even if the employee terminates the employment.
Given its potentially-enormous consequences for the enforceability of noncompete agreements in Illinois, the decision has received tremendous attention.
Judge Gettleman summarized the state of the law following the Fifield decision as follows:
[S]ome Illinois courts have adopted a two year bright line rule. [Fifield v. Premier Dealer Servs., Inc., 993 N.E.2d 938, 943 (Ill.App. Ct. 2013)]; Prairie Rheumatology Assoc., 24 N.E.3d 58, 62 (Ill. App. Court 2014).
Other courts, however, have rejected the two year bright line rule in favor of considering other factors in determining whether sufficient consideration was given to enforce a restrictive covenant. Such factors include compensation (including raises and bonuses) and the terms of the employee’s termination. See Montel Aetnastak, Inc. v. Missen, 998 F.Supp.2d 694, 716 (N.D. Ill. 2014); Bankers Life, 2015 WL 515965 at *3; LKQ Corp. v. Thrasher, 785 F.Supp.2d 737, 742-44 (N.D. Ill. 2011).
The Illinois Supreme Court has not reached the issue. Four federal courts in the Northern District of Illinois have reached the issue, predicting how the Illinois Supreme Court would rule. Judge Holderman predicted and adopted the two year bright line rule. Instant Technology, LLC v. DeFazio, 40 F.Supp.3d 989, 1010 (N.D. Ill. 2014). Judges Castillo, Dow, and Shah have rejected the bright line approach and instead employed the fact-specific approach. Montel Aetnastak, 998 F.Supp.2d at 716; Traffic Tech, Inc. v. Kreiter, 2015 WL 9259544 at *5 (N.D. Ill. 2015); Bankers Life, 2015 WL 515965 at *3-4 (N.D. Ill. 2015). In addition, Judge McDade in the Central District of Illinois has performed an extensive analysis of the case law and also concluded that the Illinois Supreme Court would reject the two year bright line rule. Cumulus Radio Corp. v. Olson, 80 F.Supp.3d 900, 905-09 (C.D. Ill. Feb. 13, 2015).
Joining the majority, the court held as follows:
This court agrees with the reasoning of the Montel Aetnastak, Traffic Tech, Bankers Life, and Cumulus Radio decisions and concludes that the Illinois Supreme Court would reject a two year bright line rule in favor of a fact specific test. Two years may be sufficient to find adequate consideration, but it is not always necessary. In reaching this decision the court also finds persuasive Justice Schmidt’s dissent in Mudron, in which he points out the difference between the employee being terminated and resigning. As he noted in discussing the case on which the Mudron majority relied, “in Mid-Town [Mid-Town Petroleum Inc. v. Gowen, 243 Ill.App.3d 63 (1993)] the plaintiff “quit” because the consideration failed. The majority here holds that the consideration failed because [the defendant] quit. Big difference.” Mudron, 379 Ill.App.3d at 730-31 (Schmidt, J. dissenting).
It bears mention that the decision (denying defendant’s summary judgment motion) expressly notes that the plaintiff was seeking damages, i.e., (in contrast to the typical noncompete case) the plaintiff was not seeking injunctive relief. As the court observed (quoting Judge Schmidt’s dissent in Mudron), “even a peppercorn of consideration is sufficient to support a finding of adequate consideration when one seeks damages at law while more should be required when one seeks equitable relief.”
Accordingly, the impact of the decision on noncompete cases seeking injunctive relief is uncertain.
Prior to the amendments, the bill limited the maximum duration of an employee noncompete to one year and, for employers with 20 or more employees, imposed legal fees and damages on an employer who sought to enforce an unenforceable noncompete.
The amended bill maintains those same provisions, but adds several clarifications.
First, the new version of the bill makes clear that the law will apply only to employee noncompetition agreements entered on or after May 10, 2016. Second, the bill now makes clear that certain types of restrictive covenants agreements are not intended to covered; specifically, nonsolicitation agreements (though it is unclear whether this includes no-raid agreements, sometimes included within the term “nonsolicitation agreement”), nondisclosure (or confidentiality) agreements; noncompetes arising in the context of a (reasonable, good faith) severance agreement; and noncompetes arising in the context of a sale of business (where the individual receives value related to the sale (again, potentially a bit vague)) are all outside the scope of the bill.
The legislature adjourns today, March 10, at midnight. Stay tuned!
Noncompetes and Bankruptcy: An issue that occasionally arises is how a company can protect the interests otherwise protectable by a noncompete agreement (typically, trade secrets, other confidential information, and goodwill – though others exist as well) when its former employee who is subject to a noncompete has filed for bankruptcy. Ken Vanko wrote an excellent summary of the issues and analysis in his blog post, When Bankruptcy Law Collides with Non-Compete Obligations.
Consideration for Noncompetes: One of the issues that regularly arises in noncompete litigation is whether the noncompete is supported by (sufficient) consideration. As reflected in our 50 State Trade Secrets Chart, one of the key areas of disagreement among the states is whether continued employment of the employee is sufficient consideration to support a noncompete. A recent case worth noting is NBTY, Inc. v. Vigliante, 2015 WL 7694865 (Sup. Ct. Nov. 24, 2015), a New York Supreme Court (i.e., the NY trial court) case (applying Delaware noncompete law). In that case, the court held that unexercised stock options were insufficient consideration for the restrictive covenant under Delaware law. Lisa Skruckof Outten & Golden LLP provides a nice analysis in Noncompetes Require Real Consideration to be Enforceable.
Tortious Interference: Another issue that frequently arises in noncompete litigation is whether a former employer can be liable (typically, on a theory of tortious interference) for a new employer’s decision to terminate an employee in the face of a threat of enforcement of the noncompete. The issue is complicated, but John Paul Neflen of Burr & Forman provides a nice summary in Better Think Twice About Enforcing A Non-Compete.
An exemption for low income workers. The idea is to ban noncompetes for people who rarely, if ever, should be subject to them – people like sandwich shop workers, landscapers, college interns, and the like.
A statutory maximum duration of one year.
A requirement that employers provide advance notice to employees who will be asked to sign a noncompete together with a stated right to counsel.
The details are not yet fleshed out, but each has been floated before in certain of the alternative, compromise bills that Representative Lori Ehrlich and Senator Will Brownsberger have filed over the last seven-plus years, since this movement started. (I drafted Representative Ehrlich’s first noncompete bill in December 2008, which she unknowingly filed virtually simultaneously with Senator (then Representative) Brownsberger’s filing of a proposed ban. By the spring of 2009, they began working together on a compromise, and I became the lead draftsperson for all of the various bills that followed.)
Given the history, I believe that the Speaker has given this extensive consideration, and I can only assume that his decision to include these elements in his proposal reflects his belief that there is a significant likelihood of change before the end of the session (in July).
What should you be doing now to prepare? Nothing. Changes are still a long way off. However, you do need to understand the changes when they happen, and will need to be prepared to make changes to your agreements. It will also be a good time to reevaluate the agreements overall.
Alabama‘s new so-called “Restrictive Covenant Act,” Ala. Code §§ 8-1-190-197, reproduced below, can be a bit hard to find. (Hat tip to the law firm of Sirote & Permutt, which has a nice summary of the new law here – and which is the only place where one can easily find the (correct) reference to Alabama’s new noncompete law.)
The new law carries over much of Alabama’s existing noncompete (and nonsolicit) law, but, most significantly, (1) establishes a presumption that a two-year noncompete is reasonable in duration and (2) requires mandatory judicial reformation (i.e., modification or rewriting) of overbroad noncompetes. (States take one of three general approaches to overly-broad noncompetes: reformation (in which the court essentially rewrites the language to conform the law to a permissible scope); blue pencil (in which the court simply crosses out the offending language, leaving the remaining language enforceable or not); and red pencil (also referred to as the “all or nothing” approach, as its name implies, requires a court to void any restriction that is overly broad, leaving nothing to enforce.)
What follows is the new statute:
§ 8-1-190. Void contracts; contracts allowed to preserve protectable interests.
(a) Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind otherwise than is provided by this section is to that extent void.
(b) Except as otherwise prohibited by law, the following contracts are allowed to preserve a protectable interest:
(1) A contract between two or more persons or businesses or a person and a business limiting their ability to hire or employ the agent, servant, or employees of a party to the contract where the agent, servant, or employee holds a position uniquely essential to the management, organization, or service of the business.
(2) An agreement between two or more persons or businesses or a person and a business to limit commercial dealings to each other.
(3) One who sells the good will of a business may agree with the buyer to refrain from carrying on or engaging in a similar business and from soliciting customers of such business within a specified geographic area so long as the buyer, or any entity deriving title to the good will from that business, carries on a like business therein, subject to reasonable time and place restraints. Restraints of one year or less are presumed to be reasonable.
(4) An agent, servant, or employee of a commercial entity may agree with such entity to refrain from carrying on or engaging in a similar business within a specified geographic area so long as the commercial entity carries on a like business therein, subject to reasonable restraints of time and place. Restraints of two years or less are presumed to be reasonable.
(5) An agent, servant, or employee of a commercial entity may agree with such entity to refrain from soliciting current customers, so long as the commercial entity carries on a like business, subject to reasonable time restraints. Restraints of 18 months or for as long as post-separation consideration is paid for such agreement, whichever is greater, are presumed to be reasonable.
(6) Upon or in anticipation of a dissolution of a commercial entity, partners, owners, or members, or any combination thereof, may agree that none of them will carry on a similar commercial activity in the geographic area where the commercial activity has been transacted.
§ 8-1-191. Protectable interests.
(a) A protectable interest includes all of the following:
(1) Trade secrets, as defined in Section 8-27-2.
(2) Confidential information, including, but not limited to, pricing information and methodology; compensation; customer lists; customer data and information; mailing lists; prospective customer information; financial and investment information; management and marketing plans; business strategy, technique, and methodology; business models and data; processes and procedures; and company provided files, software, code, reports, documents, manuals, and forms used in the business that may not otherwise qualify as a trade secret but which are treated as confidential to the business entity, in whatever medium provided or preserved, such as in writing or stored electronically.
(3) Commercial relationships or contacts with specific prospective or existing customers, patients, vendors, or clients.
(4) Customer, patient, vendor, or client good will associated with any of the following:
a. An ongoing business, franchise, commercial, or professional practice, or trade dress.
b. A specific marketing or trade area.
(5) Specialized and unique training involving substantial business expenditure specifically directed to a particular agent, servant, or employee; provided that such training is specifically set forth in writing as the consideration for the restraint.
(b) Job skills in and of themselves, without more, are not protectable interests.
§ 8-1-192. Requirements for validity.
In order to be valid, any contract or agreement executed pursuant to this article shall be reduced to writing, signed by all parties, and be supported by adequate consideration.
§ 8-1-193. Voidable restraints.
If a contractually specified restraint is overly broad or unreasonable in its duration, a court may void the restraint in part and reform it to preserve the protectable interest or interests. If a contractually specified restraint does not fall within the limited exceptions set out in subsection (b) of Section 8-1-190, a court may void the restraint in its entirety.
§ 8-1-194. Burden of proof.
The party seeking enforcement of the covenant has the burden of proof on every element. The party resisting enforcement of the covenant has the burden of proving the existence of undue hardship, if raised as a defense.
§ 8-1-195. Remedies and defenses.
(a) The remedies available for breach of an agreement subject to this article are:
(1) Such injunctive and other equitable relief as may be appropriate with respect to any actual or threatened breach.
(2) The actual damages suffered as a result of the breach or lawful liquidated damages if provided in the contract.
(3) Any remedies available in contract law, including attorneys’ fees or costs, if provided for in the contract or otherwise provided for by law.
(b) Nothing in this article shall limit the availability of any defense otherwise available in law or equity.
§ 8-1-196. Professional exemptions.
Nothing in this article shall be construed to eliminate any professional exemption recognized by Alabama law.
§ 8-1-197. Legislative intent; application.
It is hereby declared that this article expresses fundamental public policies of the State of Alabama. Therefore, this article shall govern and shall be applied instead of any foreign laws that might otherwise be applicable in those instances when the application of those foreign laws would violate a fundamental public policy expressed in this article.
(Note that the statute is reproduced from Westlaw, which has the full statute, together with notes, currentness, and other research services.)