Blog Posts
Labor and Employment
Employment Law Update: Delaware Supreme Court Takes a Stand on Restrictive Covenants
In Cantor Fitzgerald, L.P. v. Ainslie, C.A. No. 9436 (Del. Jan. 29, 2024), the Delaware Supreme Court signaled to its lower courts that many well-drafted restrictive covenants remain valid and enforceable. The Cantor Court unanimously reversed the Delaware Chancery Court’s ruling, which had rejected as unenforceable a financial services company’s limited partnership agreement clause under which a limited partner’s equity is forfeited if the partner violates non-competition provisions. The decision is noteworthy because the Court of Chancery has increasingly demonstrated a willingness to strike down overly broad non-compete agreements, accompanied by a growing reluctance to revise (or “blue pencil”) agreements by narrowing their terms. The Court of Chancery held that the non-compete and non-solicitation provisions contained in the limited partnership agreement, which had a worldwide geographic scope, were geographically overbroad and unenforceable. Additionally, the Court of Chancery found the definition of “Competitive Activity” overbroad due to its inclusion of “any Affiliated Entity,” reasoning that “it is highly possible that a partner could unknowingly engage in a Competitive Activity.” 2023 WL 106924, at *18. Notably, the court declined to “blue pencil” the provisions to make them more reasonable. The Court of Chancery then focused on the forfeiture-for-competition provision triggered by “Competitive Activity.” The Court of Chancery considered whether it should evaluate the forfeiture-for-competition provision (which it called a “Conditioned Payment Device”) for reasonableness or apply contractual deference under the “employee choice” doctrine. The court determined that “forfeitures do not enjoy this Court’s contractarian deference” and conducted a reasonableness analysis. Id. at *24. Although the court applied a “lenient” reasonableness test, it nonetheless determined that the Conditioned Payment Device was unreasonable and invalid, given the broad definition of “Competitive Activity,” the lack of an established legitimate business interest for the broad restrictions, and the four-year temporal scope, which extended beyond the temporal scope of the contractual non-competition and non-solicitation provisions. Id. at *26. The Supreme Court disagreed, highlighting the distinction between non-competition clauses for former employees and those for former partners. It ruled that partnership agreements could include consequences not typical in standard contracts, like penalties and forfeitures. While the Delaware Supreme Court’s decision was specific to limited partnership agreements, employers should still take note. Put another way: while employment-based non-compete clauses are still subject to a reasonableness standard, the tides in Delaware may be shifting back towards the employer-friendly interpretation of restrictive covenants, at least for now (and until there is more clarity surrounding the FTC’s final rule). Moreover, such provisions may not be enforceable in specific industries, such as law firm partnership agreements where ethics rules may be implicated due to a chilling effect on a client’s right to select counsel. Furthermore, following the Cantor ruling, the Delaware Supreme Court accepted an interlocutory appeal regarding a Chancery Court ruling in Sunder Energy, LLC, v. Jackson, C.A. No. 455, 2023 (Del. Jan. 25, 2024). This case concerns the denial of a preliminary injunction to enforce a non-compete provision in a limited liability company agreement and a refusal to engage in blue-penciling. The Delaware Supreme Court’s stance on the matter remains to be determined. Given the current state of Delaware jurisprudence on restrictive covenants, employers must carefully consider any restraints on employee mobility. They should also give similar consideration to the choice of law and forum selection provisions contained in employment agreements. Thank you for reading our legal update- please get in touch with us if you have any questions or require any assistance. Sarah Goodman can be reached at sarah.goodman@offitkurman.com or 267-338-1319, and Charles McCauley can be reached at cmccauley@offitkurman.com or 484-531-1712.
February 27, 2024
Labor and Employment
Noncompete Update: Bans, New Limitations and Restrictions
Employers should remain vigilant, adapt their practices, and explore alternative measures to protect their interests in the face of shifting legal frameworks and heightened scrutiny of non-compete agreements. The Legal Intelligencer By Sarah R. Goodman In today’s rapidly changing business environment, the utilization and enforcement of noncompete agreements and restrictive covenants have become central to maintaining a competitive edge. As businesses adapt to new economic, technological, and workforce dynamics, the legal frameworks surrounding these agreements are also evolving. Notably, two federal agencies are actively working to diminish the prevalence of noncompete agreements. An increasing number of states are joining the ranks of jurisdictions that either prohibit or place significant restrictions on noncompetes, including many nonsolicitation agreements, by enacting comprehensive bans or introducing new limitations. Meanwhile, certain states, while not entirely banning noncompetes, have introduced fresh restrictions. In addition, courts are recognizing novel legal theories for challenging these agreements. Nevertheless, there are still scenarios in which employers can utilize noncompete agreements to safeguard their proprietary information and defend against unfair competition. However, there are formidable new obstacles to overcome, and the regulatory landscape may change in the near future. Recent Key Regulatory Changes On Jan. 5, 2023, the Federal Trade Commission (FTC) introduced a proposed rule aimed at banning most noncompete agreements in the United States on the basis that they constitute unfair methods of competition. The FTC’s proposal attracted significant attention and the public comment period closed on March 20. The FTC has yet to issue a final rule or provide a timeline for doing so; observers closely following the proposed ban do not anticipate a final FTC rule until April 2024 at the earliest. When (and if) the FTC issues the final rule, it will be subject to numerous court challenges by a variety of private entities, including the U.S. Chamber of Commerce. It is unclear whether the final rule will survive attack. Basis for attack include the FTC Act’s own limitations on the FTC’s authority vis-à-vis the history of Section 6(g) and unfair competition; the U.S. Supreme Court’s aversion to upholding federal agency rules when scrutinized under the “major questions” doctrine; the rule itself being an improper delegation of legislative authority under the nondelegation doctrine; and the everchanging political landscape. Despite these challenges, federal agencies are increasingly utilizing new methods to challenge noncompete agreements. This includes an increasing number of antitrust claims targeting traditional noncompetes (and not just no-poach agreements), along with intra-agency cooperation between the FTC, the U.S. Department of Labor, and the National Labor Relations Board (NLRB) to help regulate noncompetes. The NLRB’s general counsel, Jennifer Abruzzo, has taken her own stand on noncompete agreements. On May 30, Abruzzo issued a memorandum expressing her view that most post-employment, noncompete and nonsolicitation agreements violate the National Labor Relations Act (NLRA). In the memorandum, addressed to all regional directors, officers-in-charge and resident officers, Abruzzo asserted that these agreements impede the exercise of Section 7 rights under the NLRA for nonsupervisory employees. She opined that, with few exceptions, the offering, maintenance, and enforcement of such agreements likely violate Section 8(a)(1) of the NLRA. While the NLRB itself had not yet ruled on Abruzzo’s position, it could issue a ruling soon that broadly prohibits non-competition (and nonsolicitation) agreements. Jurisdiction-Specific Challenges to Noncompetes The landscape has also been altered by new state laws. Five states, namely California, Colorado, Minnesota, North Dakota and Oklahoma, have instituted comprehensive bans on virtually all noncompetes with very limited exceptions, such as for certain business sales. California has strengthened its existing noncompete ban, granting employees the ability to obtain attorney fees for successful challenges. Several other states are considering similar laws. On June 20, the New York State Legislature passed a bill banning post-employment noncompetition agreements. While Gov. Kathy Hochul has yet to sign the bill, she has until the end of the year to do so. States that do permit noncompetes are enacting broader restrictions. Over 20 states prohibit various categories of noncompetes, including laws that ban all no-poach agreements and all traditional noncompetes for employees earning less than a specific salary threshold. A growing trend is legislation requiring that employers give individuals advance notice (or a “consideration period”) before the employee can sign a restrictive covenant agreement. Employers in all states, even those without specific laws, must satisfy a common law test for enforcing a noncompete, demonstrating that it is necessary and narrowly tailored to protect a legitimate business interest, typically in terms of geographic scope and duration. Employer Response: Stay Alert and Be Proactive Employers currently using noncompete agreements should assess their current approach and formulate contingency plans for a future where noncompetes might become illegal. While it may take time for a broad noncompete ban to take effect, existing agreements may not be “grandfathered” in or exempted, necessitating alternative safeguards for proprietary information and competitive defense. It is also time to consider other options for protecting business interests. This includes bolstering confidentiality agreements to address gaps left by noncompete bans. Well-drafted confidentiality agreements, coupled with remedies for violations, can offer effective protection for proprietary information. Existing laws like the federal Defend Trade Secrets Act and state laws can serve as alternatives to noncompetes in safeguarding trade secrets. Employers should ensure they treat key proprietary information as trade secrets and consider including arbitration clauses and other provisions for securing relief in their agreements. Modifying employee compensation structures may also discourage unfair competition. For example, introducing longevity bonuses and seniority-based pay raises may deter departures of senior employees who pose a competitive threat. Improving training can also help fill gaps left by noncompete bans. When pursuing mergers, acquisitions, or other deals, account for the evolving legal landscape. Ensure that agreements provide adequate protection in the event of noncompete bans or increased restrictions. Employers should also begin utilizing noncompetes strategically, rather than applying a one-size-fits-all approach to all employees. Overly broad usage may invite scrutiny and threaten the enforceability of truly important agreements for key employees. In other words: treat noncompetes as a precise tool, not a weapon of mass destruction. Employers should remain vigilant, adapt their practices, and explore alternative measures to protect their interests in the face of shifting legal frameworks and heightened scrutiny of noncompete agreements. Reprinted with permission from the October 23, 2023, edition of The Legal Intelligencer © 2023 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.
November 3, 2023
Labor and Employment
Post-McLaren: How Confidentiality and Non-Disparagement Provisions in Severance Agreements Interact with Section 7 Rights
Confidentiality and non-disparagement clauses are frequently included by employers when negotiating and drafting severance agreements. Several recent challenges, on both the state and federal level, have been made to these types of provisions, specifically, whether they are illegal on their face and/or unduly coercive. The National Labor Relations Board (“NLRB”) recently chimed in, holding in McLaren Macomb, 372 NLRB No. 58, that an employer violates Section 7 of the NLRA “when it proffers a severance agreement with provisions that would restrict employees’ exercise of their NLRA rights,” including agreements containing broad confidentiality and/or non-disparagement prohibitions. Thus, under McLaren, an employer violates the NLRA, which applies to both union and nonunion employees, anytime it offers a severance agreement to an employee that contains an unreasonably broad confidentiality and/or non-disparagement provision – whether the employee signs the agreement is irrelevant. The McLaren decision has sparked significant interest. On March 22, 2023, NLRB General Counsel Jennifer Abruzzo issued GC Memo 23-05 (the “GC Memo”), which addresses questions raised by the decision and provides guidance to employers. The memo confirms that confidentiality clauses that are narrowly tailored to restrict the dissemination of proprietary or trade secret information, have a limited duration, and are based on legitimate business reasons are permissible. Similarly, the memo notes that it is acceptable to restrict employee statements that are “maliciously untrue, such that they are made with knowledge of their falsity or with reckless disregard for their truth or falsity.” The memo also confirmed that the McLaren decision will apply retroactively; therefore, agreements proffered to employees prior to February 21, 2023, may be subject to challenge up to six months after the unlawful proffer if unsigned. Executed agreements containing unlawful provisions are not subject to any time bar if they do not contain an expiration date. Importantly, the GC Memo also clarified that the decision is not limited to severance agreements. The types of provisions that may interfere with Section 7 rights include noncompete clauses, non-solicitation clauses, no-poaching clauses, broad liability releases and covenants not to sue that go beyond the employer and/or employment claims, and cooperation requirements involving any current or future investigation or proceeding involving the employer as that affects the employee’s right to refrain under Section 7, such as if the employee were asked to testify against co-workers that the employee assisted with filing an unfair labor practice charge. Considering the McLaren decision and the GC Memo, employers should review and update their template agreements to mitigate or eliminate risk. This includes not only severance agreements, but also any separation or settlement agreements and other employment-related documents. Employers may also want to consider whether to take the preemptive remedial action of notifying prior recipients of agreements that overbroad confidentiality and non-disparagement restrictions will not be enforced.
April 11, 2023
Business
FTC Seeks to Ban Non-compete Clauses: What This Really Means for Your Business
Today we will cover how the FTC seeks to ban non-compete clauses and what this means for your business. On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule banning employers from imposing non-competes on their workers. The rule is undoubtedly politically motivated as it was issued in response to President Biden’s Executive Order that encouraged the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The FTC believes a non-compete is a “widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” By stopping this practice, the FTC erroneously estimates wages would increase by nearly $300 billion per year, and it would expand career opportunities for 30 million Americans. By stopping this practice, the FTC erroneously estimates wages would increase by nearly $300 billion per year, and it would expand career opportunities for 30 million Americans. Scope of Proposed Rule to Ban Non-compete Clauses The FTC’s proposed rule would prohibit employers from using non-compete clauses – i.e., any contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, within a specific geographic area and period of time after the conclusion of the worker’s employment with the employer. It would make it illegal for an employer to: enter into or attempt to enter into a non-compete with a worker; maintain a non-compete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a non-compete. The proposed rule would apply to “workers,” broadly defined by the FTC to include employees, individuals classified as independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a client or customer. The rule also includes a “functional test” for determining what constitutes a “de facto” non-compete clause that has the same effect as an express non-compete clause – the same test employed by courts in states that already have express prohibitions on non-compete clauses. Effective Date of Proposed Rule Importantly, this is a proposed rule that is not in effect. The proposed rule is in a comment period until March 20, 2023. We do not believe it will go into effect, if at all, until after a lengthy court battle ending with a ruling from the United State Supreme Court. Then, even if the proposed ban becomes law, employers will have 180 days to revise their agreements to conform with the law. Moreover, there are a variety of tools, such as reasonably tailored non-disclosure agreements and confidentiality provisions, employers can use to accomplish their goals without violating the proposed ban. The proposed rule is the first step in a long process that will take years to complete. We expect the FTC will receive thousands or hundreds of thousands of comments to consider. Based on the comments, the rule will be revised. It could take the FTC until late 2023 or even the end of 2024 to issue a final rule. After the final rule is set forth, it will be subject to a legal challenge (or challenges); this will undoubtedly delay the effective date into 2025 or later, assuming the final rule survives any legal hurdles it faces. During this challenging period, a presidential election will occur, and the political winds will likely change, potentially further reversing the course of the FTC. Criticism of the Proposed Rule The U.S. Chamber of Commerce has opined that the FTC lacks the authority to issue the rule and ignores the benefits of non-competes. A senior vice president for the U.S. Chamber of Commerce has stated: “Attempting to ban non-compete clauses in all employment circumstances overturns well-established state laws which had long governed their use and ignores the fact that, when appropriately used, non-compete agreements are an important tool in fostering innovation and preserving competition.” An FTC Commissioner issued a dissenting statement when the proposed ban was announced. The dissenting statement outlined potential legal challenges noting the FTC lacks the legal authority to issue the ban, and the rule is barred by a recent United Supreme Court decision. Even if the FTC has authority, it is an impermissible delegation of that authority. The proposed rule must overcome extensive case law upholding the use of non-compete clauses that are determined to be reasonable unless they are unreasonable as to time or geographic scope. Even if the FTC has authority, it is an impermissible delegation of that authority. Exemptions to Proposed Rule to Ban Non-compete Clauses The proposed rule would exempt non-compete agreements that a person entered in connection with the sale of a business, but only if that person owned 25% or more of that business. The FTC is also seeking comments as to whether: non-compete clauses between employers and senior executives should be subject to a different standard; the rule should apply uniformly to all workers; and the rule should impose a categorical ban on non-compete clauses. Alternatives to Non-compete Clauses Employers are not without options. The FTC’s proposed rule’s definition of a non-compete clause does not include other types of covenants. Accordingly, employers should begin analyzing their confidentiality clauses, non-solicitation, and non-disclosure provisions. Carefully drafted provisions can ensure that employers are able to protect confidential information and customer relationships, as well as the poaching of current employees by former employees. Employers should also use this as an opportunity to strengthen trade secret protection plans. Employers should also use this as an opportunity to strengthen trade secret protection plans. What Should I Do as an Employer? There is no need to panic. The proposed rule will not go into law in its final form, if at all. However, now is the time to implement proper planning techniques into agreements with employees. As noted previously, with proper legal counsel, non-compete, non-solicitation (vertically and horizontally), confidentiality, non-disclosure, and other restrictive covenants can be used to accomplish the goals of employers, most of which are not within the scope of the current version of the proposed rule. With proper legal counsel, non-compete, non-solicitation, confidentiality, non-disclosure, and other restrictive covenants can be used to accomplish the goals of employers. Conclusion Thank you for reading our blog on how the FTC seeks to ban non-compete clauses and what this means for your business. Please contact us immediately so that we can assist you in your planning and contract drafting process to properly implement such restrictions to protect your business. Charles McCauley can be reached at cmccauley@offitkurman.com or 484-531-1712, and Sarah Goodman can be reached at sarah.goodman@offitkurman.com or 267-338-1319.
February 24, 2023
