doctorContinuing my review of new employment-related bills is a measure that limits the use of non-compete agreements for doctors.

Anyone who tracks bills knows that the name on the bill sometimes doesn’t match the content. Senate Bill 351 entitled “AN ACT CONCERNING MATTERS AFFECTING PHYSICIANS AND HOSPITALS” is a good case in point.

Seems innocuous enough, right? But through various amendments and compromises, it actually contains specifics on what can or cannot be in a non-compete agreement for physicians.  (For limits in other professions, see prior posts here and here.)

In general, the bill sets up a one year and 15 mile limit for physician non-compete agreements for any agreement after July 1, 2016.

The bill does not specify what is to happen to existing agreements that may have broader restrictions; will courts find that they violate the new ‘public policy’ of Connecticut, as the attorneys at the Working Together blog suggest? That remains to be seen.

For employers that have yet to draw up agreements, arguably there is a 60-day window to do so but given that this may now become law, it might be too little too late.  (I have not heard whether the governor intends to veto this measure.)

For existing agreements, it appears that the review will attempt to mirror common law with three standards (note that the term “covenant not to compete” is actually defined as being applicable only to physicians).  These standards are:

A covenant not to compete is valid and enforceable only if it is: (A) Necessary to protect a legitimate business interest; (B) reasonably limited in time, geographic scope and practice restrictions as necessary to protect such business interest; and (C) otherwise consistent with the law and public policy.

The bill goes on to state that:

A covenant not to compete that is entered into, amended, extended or renewed on or after July 1, 2016, shall not: (A) Restrict the physician’s competitive activities (i) for a period of more than one year, and (ii) in a geographic region of more than fifteen miles from the primary site where such physician practices;

Simple enough, right? Well, not exactly, the agreement also shall not:

(B) be enforceable against a physician if

(i) such employment contract or agreement was not made in anticipation of, or as part of, a partnership or ownership agreement and such contract or agreement expires and is not renewed, unless, prior to such expiration, the employer makes a bona fide offer to renew the contract on the same or similar terms and conditions, or

(ii) the employment or contractual relationship is terminated by the employer, unless such employment or contractual relationship is terminated for cause.

That’s a lot of “ands” and “unlesses” if you’re keeping track at home.  But one thing I’m sure of is that a “for cause” termination allows for more flexibility.

But what is “for cause”? Can it be defined by the employer? Or is the legislature using another definition of “cause”? That, unfortunately, is a question for another day.

For now, physician groups, hospitals and other health care providers need to track signing of the measure and, if signed, review all existing agreements and form agreements for compliance with this new potential law.  The one-year/15 mile restriction should become the norm.

And if you have a strong opinion against this measure, now would be a good time to lobby the governor to veto it.

 

The New York Times this morning has an article that suggests that non-compete agreements are being used increasingly in a broader array of jobs.

Pick your fights carefully

His evidence? Well, the article doesn’t cite that.

Though, to the reporter’s credit, in noting the discussion going on in Massachusetts over legislation on the topic, he cites to a trade group’s executive vice president who said, “The ban to noncompetes is legislation in search of an issue.”It quotes one professor as saying “There has been a definite, significant rise in the use of noncompetes, and not only for high tech, not only for high-skilled knowledge positions.”

Connecticut went through this same discussion last year. Indeed, a watered-down bill restricting the use of non-compete agreements passed the Connecticut General Assembly last year.  But Governor Malloy vetoed it stating that the bill left “certain key terms undefined or unclear.”

“As a result” he added, “this bill has the potential to produce legal uncertainty and ambiguity in the event of a merger or acquisition. If I signed into law, costly and time-consuming litigation would likely be required to provide necessary clarity.”

Thus, Connecticut is still following the “common law” when it comes to non-compete agreements — that is, the law that has been developed through court cases over the years.  Even the Connecticut Law Tribune suggested that such a path may be the right one for the state:

Noncompetition agreements have a valid place in today’s economy, but their growing use to stifle healthy marketplace competition, their theoretical underpinnings as a strained corollary to the employment at-will rule and the disproportionate bargaining strength often used by employers to obtain them have infected these contracts with a taint of inherent unfairness and commercial impropriety. There is a need for reform—reform carried out through the process of common law evolution.

The governing principles of noncompete agreements in Connecticut have been fairly well-settled.  As one court stated nearly 40 years ago:

In order to be valid and binding, a covenant which restricts the activities of an employee following the termination of his employment must be partial and restricted in its operation “in respect either to time or place, … and must be reasonable—that is, it should afford only a fair protection to the interest of the party in whose favor it is made and must not be so large in its operation as to interfere with the interests of the public.  The interests of the employee himself must also be protected, and a restrictive covenant is unenforceable if by its terms the employee is precluded from pursuing his occupation and thus prevented from supporting himself and his family.

What does that mean for employers? Ultimately, it means creating a non-compete that is narrowly tailored to protect a legitimate business interest. Having all employees — from your senior vice president to the mail clerk — sign the same agreement with the same restrictions may prove to be its undoing.

There are, of course, exceptions to the rule — security guards, for example. California bans them.  Other states, like Georgia, have statutory restrictions on them.

So before you seek to enforce your non-compete agreement, check with local counsel first to make sure it’s going to pass muster.

 

Last month, the General Assembly passed a bill in the closing hours of the legislative session that would have voided certain non-compete agreements in the event that a business was merged or acquired.  It was a watered-down version of a bill that had been weaving its way through the legislature that would have placed limits on all non-compete agreements.

Malloy Vetoes Noncompete Bill

But even this watered down version of the bill was not good enough for Governor Malloy.

On Friday, the Governor vetoed it with a short message. In it, he complained that the bill left “certain key terms undefined or unclear.”

“As a result” he added, this bill has the potential to produce legal uncertainty and ambiguity in the event of a merger or acquisition.   If I signed into law, costly and time-consuming litigation would likely be required to provide necessary clarity. It would be better for both employers and employees to receive greater clarity from the General Assembly on this issue next session.”

He did leave the door open for a revised bill next year though.  He signaled, for example, that “additional protections for employees may be warranted to guarantee a reasonable period of time to review a written non-compete agreement.”

For employers, this means that the issue of non-compete agreements is essentially dead for another legislative year.  Will this get brought up for a vote in 2014, when more politicians are up for re-election? That remains to be seen.

At least for now, though, employers can go through mergers and acquisitions without worry of at least this aspect of the law.

Back in June, I talked about a new district court case on restrictive covenants.  My law partner, Joshua Hawks-Ladds, follows up today with results of the appeal. For employers who have a non-compete agreement, this decision emphasizes the need to seek an injunction quickly to protect the employer’s interests.

Let’s say that you, as an owner or chief executive of a company, had your company’s key employees sign restrictive covenants limiting, for one year after separation of employment, the employees’ ability to compete with your business or solicit your company’s customers or employees.

Let’s assume that an employee violates one or more of the restrictions (by competing or soliciting in violation of the covenants).  Suppose the restrictive covenant expired before you were able get an injunction from a court enjoining the former employee’s anti-competitive behavior.

Do you still have the right to seek an injunction enforcing the restrictive covenant after the restrictive period ended?

The Second Circuit Court of Appeals recently opined on that question stating that a request for injunctive relief, and specifically a request for a temporary and/or permanent injunction, based upon an expired noncompetition covenant is moot and such injunctive relief will not be granted. Aladdin Capital Holdings, LLC v. Donoyan, 11-2363-CV, 2011 WL 4063012 (2d Cir., Sept. 14, 2011) .

The Second Circuit decision affirmed a Connecticut District Court decision that follows dicta from the Connecticut Supreme Court, in which the court stated that the expiration of a restrictive employment covenant renders an employer’s later request for injunctive relief moot.   But the Supreme Court did not provide a clear holding on the issue after the Superior Court in Van Dyck Printing concluded that the employer’s request for an injunction prohibiting a former employee from competing with the company was moot, since by the time the request came before the Court, the period specified in the former employee’s restrictive covenant had already passed.  The Supreme Court had merely agreed with the Superior Court’s decision stating “the plaintiff’s claim for injunctive relief had become moot by the time of trial.”

But the Aladdin court affirmatively held that when restrictive covenants have “expired by their own terms; their restrictions on (a former employee’s) activities are now lifted. As a result, (any) alleged “continued violations of (the restrictive) … covenants are no longer continuing: they have already occurred.”  

Thus, as a matter of law, a request for injunctive relief based on a restrictive covenant is moot upon the expiration of the period specified in the parties’ restrictive covenant.

How then does a company protect itself when a former employee violates a restrictive covenant, but an injunction has not been issued before the restrictive period ends?

The company must include language that expressly permits extension of the restrictive covenant during the period of breach or threatened breach of the covenant.  In that way, a court can hold that a breach of the restrictive covenant will result in an extension of the restrictive period.

If your company’s agreement with its employees restricting post-employment competition does not contain language that expressly permits extension of the restrictive covenant during any period of breach or threatened breach of the agreement, the agreements need to be modified (something we can obviously assist on) because unless the agreement explicitly states otherwise, the restrictive covenant ends when the restrictive period terminates.

Suppose a former employee has breached your company’s covenant not to compete after she left employment.  Are you, the employer, entitled to get the non-compete period extended as a remedy for the breach?

Great question. And one that differs depending on the state.

A federal court in Connecticut (Aladdin Capital Holdings, LLC v. Donoyan) looked at the different paths that various state courts use to analyze the issue. In a decision released last week, it found:

  • First, some courts have reasoned that a court has broad and inherent power to extend the duration of a restrictive covenant as an equitable remedy for breach.
  • Second, some courts have suggested that the duration of a restrictive covenant may only be extended as a remedy for breach if the parties included language in their restrictive covenant contemplating such a remedy.
  • Third, some courts have reasoned that the contractually-specified duration of a restrictive covenant may never be extended by a court as a remedy for breach.
The Federal Courthouse in New Haven

So, what’s the proper result in Connecticut?

Well, in this case, the court rejected the employer’s argument for an extension. In doing so, it concluded that the ending of the restrictive covenant time period ends the matter.  In fact, the court concluded “The Court finds no evidence that the Connecticut Supreme Court would follow the decisions of other states’ high courts that have held that trial courts have broad equitable power to extend even an expired restrictive covenant as a remedy for breach.”

But all is not hope for employers in Connecticut.  The court did suggest that the result might be different if  “the restrictive covenant contains language that expressly permits extension of the restrictive covenant.”  In that type of situation, the court might then possess the power to extend the duration of the non-compete.

What’s the Takeaway for Employers?

If you use non-compete agreements or other types of restrictive covenants, consider adding a provision that expressly permits an extension of the restrictive covenant if the employee breaches the agreement.  That way, you may have an additional type of remedy besides seeking monetary damages.

In addition, employers may want to review their existing agreements to see if that language is present and consider amending them at an appropriate time to add this provision if necessary.

 

My colleague, Jonathan Orleans, chips in this week with a guest post on a recent Connecticut case about some of the restrictions that employers try to place on departing employees:

Post-employment covenants not to compete and not to solicit frequently include language that prohibits the former employee from “directly or indirectly” engaging in certain behavior, such as offering services to the former employer’s customers or soliciting its employees. 

But what does this phrase actually mean? If a new employer – which, after all, is not a party to the covenant – solicits the prior employer’s customers or employees, has the employee “indirectly” engaged in the prohibited behavior? 

These questions were addressed in a recent Connecticut Superior Court decision, PCRE d/b/a Prudential Realty v. Unger, 2010 WL 2364267 (Conn. Super. April 30, 2010).

First some background: Adele Unger was employed by Prudential Realty and agreed to a one-year post-employment covenant that she would not “directly or indirectly hire, contract with, induce or attempt to influence any individual who is an employee, independent contractor, agent or representative of [Prudential Realty] to terminate such person’s employment or association with [Prudential Realty] or its affiliated companies.” 

Unger left Prudential for a position with William Pitt Real Estate, and told Pitt’s President Paul Breunich that she could not recruit Prudential agents. Nonetheless, Breunich called several Prudential agents to solicit them to join Pitt. Prudential sued, naming not only Unger but also Breunich and Pitt as defendants, and claiming that Breunich’s activities on behalf of Pitt were, essentially, indirect solicitations by Unger.

Prudential argued that “one who is not a party to a noncompete contract can be enjoined from activity prohibited by the contract where the person or entity is operating indirectly for the party to the contract.” 

Distinguishing the cases cited by Prudential, the court (Scholl, J.)  observed that Unger had not solicited Prudential agents, and there was no evidence that Breunich had used any information supplied by Unger to aid him in his solicitations of Prudential’s employees. 

This was not a case where the employee organized a company to do what he could not do individually, where the new employer acted in conscious disregard of the employee’s obligations to the former employer, or where the employee had someone else act on his behalf in violation of the restrictive covenant. The court denied Prudential’s application for a temporary injunction as to Breunich and Pitt.

What lessons can be drawn from this case for employers?

First, in drafting covenants, be specific about the conduct you intend to prohibit. Don’t rely on phrases like “directly or indirectly” to sweep in conduct you haven’t specified. And improve your odds in any claim against a new employer by requiring the employee to inform the new employer of his or her post-employment obligations.  (Admittedly, this wouldn’t have helped in PCRE, where Unger volunteered the information to Breunich.)

Second, in enforcing these covenants, don’t overreach. In an industry where movement of sales employees among competitors is a common phenomenon, you’re probably wasting your time and money trying to enforce a restrictive covenant if you don’t have solid evidence that your former employee has actually violated her obligations, or actively directed someone else to do so. Suspicions and accusations about “indirect” violations are not likely to get you the result you want.

 

Have you taken steps to prevent your business from walking out the door? That issue — and the overall use of restrictive covenants will be the subject of today’s free webinar at noon. You can sign up here

Our monthly webinar series (after taking the holiday period off) runs on the second Wednesday of each month. 

In our past webinars, attendees have asked if we could post the presentation materials ahead of time.  You can view those materials here.