Over the weekend, The New York Times ran a surprising (at least to me) article about how Idaho has implemented a legal framework that gives employers a great deal of flexibility in an area getting a good deal more publicity of late: Non-compete agreements. (H/T to a post by Suzanne Lucas in Inc. too.)

When everyone has a non-compete agreement, what problems does that cause? Lots, according to the article:

For the most part, states have been moving toward making it easier for people to switch teams, but Idaho went the other direction with legislation that was friendlier to employers. The resulting law was particularly strict because it put the onus on employees to prove that they would not harm their former employers by taking the new jobs.

Proponents note that the statute applies only to “key employees” who tend to have more responsibility and better pay. But employment lawyers say Idaho companies tie down all levels of workers, not just top executives, with tough employment contracts.

Contrast that with California, which bans nearly all types of non-compete agreement, and lately, Massachusetts, and suddenly, Connecticut’s laws on non-compete agreements look downright moderate.

Indeed, for now at least, Connecticut employers have a good deal more flexibility on non-compete agreements that in other areas of employment law.

In fact, I was reminded of this when I looked back on a post from 2014 that noted the same thing — also in response to an article from The New York Times. It seems back then, the newspaper was also bemoaning the increasing use of non-compete agreements. Hmm.

In any event, employers in Connecticut should be mindful of this edict from the courts from 40 years ago that still rings true today:

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.

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.

 

Back in June, I talked about the standard that courts will follow in deciding whether or not to enforce a non-compete agreement between an employer and an employee.  (Go read it here first.)

But many employers want to know something more straightforward: How long can I make the restrictive covenant in my agreement; in other words, how long can the non-compete provision be?

The answer, of course, is “it depends” — in general, the higher-ranked the employee, the broader the scope of the non-compete.  And it also depends on other factors, such as the type of businesses the employee would be prevented from working for, and the geographic nature of the restrictions.

Of course, that’s not a satisfying answer either because again, the central questions is, what’s the maximum amount of time that a court will enforce a non-compete agreement?

In Connecticut, two years is seen by some as the typical time period for enforcing a non-compete agreement, as one case ruled back in 1988.

But where the time restriction is accompanied by a narrow geographic or industry restriction, courts have granted non-competes of five years.  Here are some examples:

Can you do something longer? Perhaps. In one reported instance in another state, a ten year non-compete agreement was ruled enforceable! But that’s definitely the exception, rather than the rule.

Indeed, a five-year non-compete isn’t going to work in some (many?) employment agreements.  So before you rewrite all of your agreements to have a broad restrictive covenant, you should check with experienced employment law counsel and figure out if your agreement really is narrowly tailored to meet you needs.  And experienced counsel can also add in certain contract provisions to help in those instances where the courts may have concerns with a broader non-compete.

But if you’ve been wondering if you courts enforce five-year non-compete agreements, the above cases show that it happens — perhaps even with more regularity than you might first think.

One of the bills that passed the Connecticut General Assembly last year was a bill that would have limited the scope and use of noncompete agreements.

But as I noted in a post last summer, Governor Malloy vetoed that piece of legislation.

In his veto message, however, he signaled a willingness to agree to some future compromise on the bill noting that “additional protections for employees may be warranted to guarantee a reasonable period of time to review a written noncompete agreement before entering into an agreement in the first instance.”

He went on state that “it would begetter for both employers and employees to receive greater clarity from the General Assembly on this issue next session.”

Late last month, the Connecticut Law Tribune ran an editorial suggesting that a legislative solution may not the best path forward, even in light of what it viewed as employer’s over reliance on them.

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.

Why did the editorial board conclude that legislative remedies are “not the best answer”?Because they are often “drastic and short-sighted”.  The board instead proposed that change come about in “orderly judicial reconsideration and doctrinal evolution.”

The editorial goes on to discuss the issues with noncompete agreements in greater detail and it’s worth a read.  It notes that noncompete agreements “have a valid role to play in Connecticut’s economic mosaic” and that “legislative reform would doctrinally freeze them in time.”

It is advice well worth considering as the General Assembly takes up this task.  It may be best to have no bill, then a lousy one.

(For a look at how one state, Georgia, has tackled this issue with legislation, check out this presentation.)

For employers, now is the time to speak up to your local legislators that a bill on the subject may not be the best path to what they may want to achieve.

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.

An article in this week’s Connecticut Law Tribune suggests “how employees can negotiate around a non-compete agreement.” 

But let’s look at the issue from the “other” side — the employer — and ask “how employers can enforce a non-compete agreement.” 

There are a number of factors that courts in Connecticut will look at in deciding to enforce a restrictive covenant as known in the legal parlance, including the time restrictions and geographic scope.

Even so, the Connecticut Supreme Court has said that “test of its validity is the reasonableness of the restraint it imposes.” If, for example, the agerement “indefinitely restricts the plaintiff’s right to future employment in a management position”, that will likely be struck down by the court. 

For employers, that ultimately 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. 

But most of all, seek experienced legal counsel to give your agreements the once over.  Yes, you can look at what other companies have done.  But tailoring the agreements to fit your particular business is crucial to be sure your agreement will be enforceable, if and when the time comes.