Smooth Transitions Law Blog
Addressing the legal issues arising from the departure of employees & business breakups

Non-Compete

The NRLB Chimes in on Non-Competes
June 8, 2023

A few months ago the NRLB made some noise when it imposed restrictions on non-disparagement and confidentiality provisions in releases/settlement agreements. Now it’s back at it with non-competes following the footsteps of the FTC.

In her memo, General Counsel Jennifer Abruzzo asserted that non-compete agreements impact the ability of employees to exercise their right to quit or change jobs. Though not outright declaring all non-competes unenforceable, she advises limiting their use. So without a doubt the FTC has non-competes in its cross-hairs with the NRLB behind.

At this point we don’t have anything definitive from either agency. What we do have are a number of state legislatures limiting or outlawing non-competes. Yesterday the New York state senate passed non-compete legislation and it is likely to be signed by the governor. New York follows Minnesota and a number of states that enacted legislation in 2022.

Instead of worrying about what the FTC/NRLB may or may not do employers should be focused on changes impacting non-compete law in states where they employ workers. The good news for Texas employers is there are no changes to the Texas non-compete statute this session. We have other things to worry about.

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Much Ado About Nothing – The Biden Non-Compete Executive Order
July 13, 2021

Back in 2015 there was a lot of publicity about a non-compete Jimmy John’s was implementing for its sandwich makers.  Here is what I said back then:

“When news of the Jimmy John’s non-compete came out last October my concern was the impact it would have on businesses with legitimate non-competes.  There is always a populist theme that is anti-non-compete.  Employees should be able to come and go as they please and a non-compete agreement prevents that.  “Bad” non-competes undermine “good” non-competes.  There are situations where non-competes make sense and there is an interest worthy of protection.  But when bad non-competes are in play and receive attention, the discussion of why we have non-competes in the first place follows.”

Non-competes are low hanging fruit for politicians but they rarely receive Presidential attention and are generally challenged on a state level. Last week the President delivered a wide ranging executive order that addressed among other things non-compete agreements.  The press release/fact sheet for the order said the following (my translation in part):

  1. Many Americans workers have non-competes;
  2. Non-competes make it harder for workers to move to higher paying jobs;
  3. The President would like to ban or limit non-competes; and
  4. The Executive Order “Encourages the FTC to ban or limit non-compete agreements.”

The actual order states:

To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.

We’ve got a long way to go before this gets anywhere.  First, of all there is a very real question of what restrictions the FTC can implement to restrict non-competes.  I can tell you here in Texas we have an attorney general that challenges any federal action that infringes on state’s rights and I doubt FTC restrictions that impact the Texas Non-Compete Statue will go unchallenged.  Second, the actual language recognizes that non-competes may be appropriate in certain situations – there isn’t going to be a ban.  Finally, even if there was a ban there remains other items in an employer’s arsenal to use including: (1) non-solicitation provisions; (2) non-disclosure provisions; and (3) notice/garden leave policies.

There was a lot of pomp and circumstance about the order but that end of the day, the death of the non-compete is not coming anytime soon.

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HR Issues  / Non-Compete Agreements  / Texas  / Trade Secrets  / Uncategorized

Texas Non-Competes in 2021
February 16, 2021

Texas non-compete law has changed very little over the last few years.  There have not been any seminal Texas Supreme Court cases construing the Texas non-compete statute and little instructive case law from our intermediate appellate courts providing guidance.  The reality is Texas trial judge are construing non-competes at the temporary restraining order/temporary injunction stages all the time but Texas trial judges don’t issue published opinions and we don’t see many appeals from those decisions.

So what are employers and employees to do?

From the Employer Side

Think narrow and reasonable.  In terms of time, the shorter the better.  Everyone always wants to two years but will six months accomplish what is necessary?  Of course every situation is different.  In terms of geography limit the covenant to where the employee worked and make sure the services they are prohibited from offering are the services they offered for the employer.  Remember the Texas statute requires that the non-compete be ancillary to an otherwise enforceable agreement meaning there has to be something of value provided to the employee.  When in doubt remember that a good customer non-solicitation provision can often be an alternative to a non-compete and easier to enforce.

From the Employee Side

First, don’t sign it unless you have to do so.  Second, consider the restrictions you will encounter if you decide to move on to another job and assume they are enforceable.   No one likes to think that way at the outset of employment but you should.  Can you push back on some of the terms?  Anything less is better.  Employers do enforce non-competes and courts will uphold them.  Don’t dismiss these restrictions as simply part of standard employment paperwork – they are not.

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Dallas  / Non-Compete Agreements

Employee Movement in the Time of Covid
October 16, 2020

We’ve now been in the midst of this global pandemic since March (give or take a few weeks) and we have a little more runway to look at the state of employee movement.  It seems that most folks fall in three categories in terms of the Coivd impact on their job: (1) looking for a job; (2) in a precarious spot and not looking to make a move; or (3) looking to make a move.  Of course these are three categories you usually see.  After the initial impact of Covid, it appears employers/employees are adjusting to our new normal.

From my admittedly limited view representing employees and employers I don’t think things are back to normal but employee movement continues.  There is generally less movement towards the end of the year because employees have compensation tied to year end bonuses and metrics.

Some general thoughts on post-employment covenants:

  1. Texas employers continue to us overly broad non-competes and non-solicits – make them narrow if you want them to stick;
  2. Texas employers are using severance packages that are tied to non-competition/non-solicitation covenants to lock down former employee.  For example, I agree to pay you $XXXX a month as long as you don’t compete.  These are simple and basically they employer gets whatever they want and the employee gets paid as long as they comply.
  3. This is a gross generalization but most employees don’t enforce their non-competes/non-solicits.
  4. Good luck enforcing a non-compete against a former employee that a company terminated in the the time of Covid.  Yes, in theory you can do it but I can’t imagine judges are going to be happy to see those types of cases in this environment.
  5. If a company includes a non-compete in a an employment agreement it generally should also include a non-solicit (customers), anti-raid (employees), and confidentiality provision.  Also, think about a notice provision for termination of employment.
  6. Employees work very hard to figure out how they can finesse the requirements of a non-compete and non-solicit so they can still make a move.

Stay safe.

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Anti-Raid  / Hiring and Firing  / Non-Compete Agreements  / Uncategorized

Don’t Discount the Exit Interview
February 19, 2020

No one likes exit interviews, well most folks don’t.  The employee is departing  the interviewer is checking off the boxes.  But, from the employer’s perspective they can be invaluable if handled correctly and I recommend them. Some considerations:

  1. Who handles the interview?  It doesn’t always have to be someone from HR.  If the departure is unpleasant perhaps there is someone that does have a good relationship with the employee that handles the discussion.  The goal is to get information.  Just make sure the interviewer asks the appropriate questions, listens to answers/tone, and follows up appropriately.
  2. What information should the employer be seeking?  To start with find out the who/what/where/when/and why of the departure.  If there are issues with the atmosphere at the company let’s here them.  The employer should be looking to improve things and avoid departures and turnover.  Would also be nice to know where they are going, how they can facilitate transition, will they be available for questions if need be.  The employee may want to vent, let them, ask open questions that seek information.
  3. Besides extracting information this is also the opportunity to provide the employee with information.  This includes any benefits they are entitled to, final paycheck information, and other nuts and bolts information.
  4. Use the interview to retrieve any company property.
  5. Most importantly – remind the employee of any post-employment covenants they have signed.  This could be non-disclosure agreements, non-competes, non-solicitation agreements etc.  Provide them with copies of the agreements if need be.  If appropriate get a written acknowledgement.  Remind the employee the company takes these agreements seriously and will enforce them.
  6. Finally, find out if they have any questions.

 

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Hiring and Firing  / HR Issues  / Non-Compete Agreements  / Non-Solicitation Agreements  / Trade Secrets

The Latest Non-Compete Hits
October 7, 2019

 

Here’s a smattering of cases/disputes that are out there:

  1. Interesting article about two cases from Ohio involving a cookie entrepreneur and taco restaurant chain owner;
  2. Not in the employment world – but a Michigan judge shut down the construction of a hotel after determining it violated a non-compete;
  3. The typical pharmaceutical sales rep case – this one from Kansas City (paywall);
  4. A non-compete case from East Texas where a doctor sued a group of nurses over a non-compete; and
  5. A lawsuit by six veterinarians in Washington challenging a non-compete contained in a shareholders agreement.

Non-competes aren’t going anywhere for now but Presidential Candidate Elizabeth Warren has promised to ban them if elected.

 

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Injunction  / Non-Compete Agreements  / Non-Solicitation Agreements

Don’t Play Defense On Your Non-Compete
August 27, 2019

Employers don’t spend enough time considering their non-competes.  That’s an overly broad statement, but it is usually the rule not the exception.  The reason that happens kind of makes sense. Most employers haven’t been down the road of enforcing a non-compete.  The provision at issue may be a one-off that’s included in one employment agreement or one that has been altered over time.  Point is there is no judicial experience with the non-compete.  The employer hasn’t actually seen the non-compete in action so there is no history.

What I seen in most cases is an attempt to make the non-compete as broad as possible, which kind of makes sense as well.  The scenario is the execution of a new employment agreement with a new employee.  The employer want the agreement to be as broad as possible and the employee may not be focused on the actual details – just the existence of the non-compete itself.  Employees don’t usually negotiate the terms of a non-compete – the real negotiation is usually over whether the employment agreement is going to contain the provision or not.  So there’s really not much dickering over the terms – which actually might help the employer.

So, the employee departs and starts to complete.  The former employer tracks down the employment agreement that was signed potentially years before and was potentially drafted by a different in house counsel or outside lawyer.  The former employer goes to the trusty lawyer who is concerned the non-compete is overly broad and a judge in Collin County or Dallas County will not like it.

A lawyer trying to enforce a non-compete has a lot of challenges.  Yes they are enforceable, yes the law has improved in Texas over the years, but that doesn’t mean Judges like them.  A lawyer want a non-compete that is narrow – it covers the work the employee actually does and who he/she actually worked with.  It does not need to tie to all the things the employer does and all the customers it has or may ever have.

An employer is putting itself at a disadvantage and in a defensive posture when it comes to an overly broad non-compete.  At best, the court could reform the non-compete through a temporary restraining order or temporary injunction.  At worst, the court could deny the relief entirely.  Don’t play defense – think narrow and don’t be greedy when drafting a non-compete.

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Non-Compete Agreements  / Non-Solicitation Agreements  / Trade Secrets  / Uncategorized

Getting Out of the Way of A Settlement
July 9, 2018

Non-compete cases that are well lawyered should be resolved early in the litigation process.  Why do I say that?  If the plaintiff is an aggressive former employer it will in most instances move for a temporary restraining order followed by an application for a temporary injunction in Texas state court.  In that process a lot of things can happen.  First, the parties will have appeared before a judge and gotten a flavor for how the judge will rule and what the judge thinks of each parties’ claims and defenses.  Second, there may be expedited discovery including document productions and depositions.  The judge may even order the case to mediation to avoid having to spend court time on a temporary injunction hearing – which is like a mini-trial.

(more…)

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Injunction  / Non-Compete Agreements  / Recent Cases

NY Times Non-Compete Article
May 22, 2017

I don’t think I’ve ever dedicated a post to a newspaper article but a recent New York Times article entitled “How Noncompete Clauses Keep Workers Locked In” does a great job addressing the human toll of non-competes.  Here is a link to the article.  The article is generally anti-non-compete when it comes to lower paid workers but cites some examples where they can make sense.  The article also focuses on the ramifications of more and more non-competes, they drive wages down.

To me the most interesting focus is on the use of non-competes to control work experience:

The growth of noncompete agreements is part of a broad shift in which companies assert ownership over work experience as well as work. A recent survey by economists including Evan Starr, a management professor at the University of Maryland, showed that about one in five employees was bound by a noncompete clause in 2014.

As someone who represents folks/companies on both sides of the non-compete equation I’m not sure I would agree with the claim that non-competes use is on the rise or that one in five employees is bound by one.  Regardless, they are out there and in numerous industries.  The publicity we most often see deals with bad non-competes, like the Jimmy Johns non-compete from a few years ago.

The economics of enforcing bad non-competes doesn’t work.  It is expensive to sue someone and get a temporary restraining order. Plus, in most circumstances lawyers are going to confront judges that don’t want to prevent a former employee from working in an industry that they may have been tied to their entire working life.  As we have discussed here on numerous occasions, the better odds on protecting a business is through enforcement is through non-solicitation agreements that prevent a former employee from calling on customers and hiring away employees.

Non-competes will continue to be dealt with on a state by state basis.  There is not going to be some federal legislation that kills them.  Employers should use them sparingly and in instances where they make sense – for highly paid employees that have received access to to true trade secrets/proprietary information or received serious training. Employers that use them must also enforce them.  Simply drafting them and not enforcing them is bad policy and undermines an employers ability to enforce them in the future.

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Injunction  / Non-Compete Agreements  / Non-Solicitation Agreements  / Trade Secrets

Texas Non-Competes Without Geographical Restrictions
March 3, 2017

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A Texas non-compete must satisfy two main components to be enforceable. The non-compete has to be ancillary to an otherwise enforceable agreement and be reasonable in time and scope. Before the Texas Supreme Court this week was a case where the court was asked to consider a non-compete without a geographical restriction and consider whether such an agreement was per se unenforceable. I discussed the issue in a recent Law 360 article that you can find here.

My short answer to the question was no on two counts. First, there is no Texas requirement that the geographic restriction appear in the non-compete. Second, it is unlikely the Texas Supreme Court would impose such a requirement. A geographic component is pretty basic. Tell me where I as an employee cannot compete with my former employer. (The same analysis could also impact non-solicitation and anti-raid agreements.) At its essence that could be a lot of things including: (1) cities, states or counties; or (2) a mileage restriction like a 10 mile radius from the employees office.

But sometimes there are agreements that don’t have a specified geography though it is implicit from the agreement itself and it is possible the restriction is nationwide. For instance, an agreement that prevents competition in any state where the employee worked with company customers or a restriction that was tied to a list of competitors. Are these unenforceable because there is no explicit geography?

The defendants in the case before the Texas Supreme Court did some bad things and got caught as they tried to compete with their former employer in the healthcare industry – a psychiatric management company. The non-compete prevented the ex-employee from working for a psychiatric management company that was in direct competition with the employer. No specific geographic restriction, right? But does that matter? Not if the non-compete is “reasonable” according to the Plaintiff and they are probably right.

First, each non-compete requires a case by case analysis. Here the non-compete was limited to 1 year – usually reasonable. Second, the Plaintiff argued the non-compete language was limited to the niche market of psychiatric management and the former employees could still work in other healthcare businesses. The trial court agreed and ruled the non-compete was enforceable.

It would seem unlikely that the Texas Supreme Court impose a bright-line geography requirement in this case. Fist, the non-compete statue requires a case by case analysis so bright-line tests really don’t work. Second, the restriction was limited to a niche market. Third, and finally, the defendants weren’t exactly the most sympathetic defendants based on their conduct.

We’ll monitor the case going forward.

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Injunction  / Non-Compete Agreements  / Non-Solicitation Agreements  / Trade Secrets



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