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.

worker3After nine-plus years of writing about employment law in Connecticut, it’s getting to be pretty rare to find a topic that I haven’t at least touched upon, but here’s one: The Duty of Loyalty.

Indeed, a new Connecticut Supreme Court case is giving me the opportunity to do so.

The case arises from an employee who, while working for one employer, was secretly working as an independent contractor for a competitor.  The employer sued under a breach of the duty of loyalty claim.

The case, Wall Systems Inc. v. Pompa, officially released last week, can be downloaded here.

Lawyers will look at the case because it sets forth what types of damages are recoverable when a breach of a duty of loyalty claim is established.  In doing so, the court makes it clear that a trial court has some discretion in fashioning the appropriate remedy:

We agree with the plaintiff that the remedies of forfeiture of compensation paid by an employer, and disgorgement of amounts received from third parties, are available when an employer proves that its employee has breached his or her duty of loyalty, regardless of whether the employer has proven damages as a result of that breach. Nevertheless, the remedies are not mandatory upon the finding of a breach of the duty of loyalty, intentional or otherwise, but rather, are discretionary ones whose imposition is dependent upon the equities of the case at hand. Moreover, while certain factors, including harm to the employer, should not preclude a finding that the employee has committed a breach of the duty of loyalty, they nevertheless may be considered in the fashioning of a remedy. Here, because the trial court properly exercised its broad discretion when it awarded damages but declined to order forfeiture or disgorgement, we will not disturb its judgment on this basis.

But I think the more interesting point for companies is to understand the scope of the duty of loyalty.

In discussing the scope of this duty, the Connecticut Supreme Court reaffirmed principles that were last set forth in detail over 50 years ago in Town & Country House & Homes Service, Inc. v. Evans.  In that case, the court found an employee breached the duty of loyalty by soliciting employer’s customers for his own competing business while still working for the employer.

The court noted that an employee’s duty of loyalty includes “the duty not to compete … and the duty not to disclose confidential information”.  The court noted that this duty not to compete is during the employment relationship — not necessarily after — and is not dependent on the use of employer’s property of confidential information.

The court went on to say that the duty of loyalty “also includes the duty to refreain from acquiring material benefits from third parties in connection with transaction undertaken on the employer’s behalf.”  What does this mean? Essentially, it bars the collection of “secret commissions and kickbacks which might cause the employee to act at the expense or detriment of his or her employer”.

An employer may seek the forfeiture of an employee’s compensation for the period of disloyalty, but the court concludes that such a remedy is an equitable one and subject to the facts of the particular case.

But it’s always important to read the footnotes and here, in footnote 9, the Court inserted the notion that the duty of loyalty may not apply all employees.  “The scope of the duty of loyalty that an employee owes to an employer may vary with the nature of their relationship. Employees occupying a position of trust and confidence, for example, owe a higher duty than those performing low-level tasks.”

Still, the case is an excellent one for employers to keep in mind — particularly if the employer does not have restrictive covenants with its employees.  If the employees are engaging in competing work while still employed, the employer can use this case — and the theories behind it — to see the appropriate remedies.

With the appropriate employee, the employer can further strengthen its arguments, but including this in an employment agreement along with restrictive covenants.  In such a case, the court reminds parties that an employer could then terminate that agreement prematurely and seek recovery of damages directly attributable to the employee’s breach.

Employers should consider consulting with their favored outside counsel to see how this decision may apply to them.

 

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.

 

Polo Ralph Lauren's agreement is online
Polo Ralph Lauren’s agreement is online

One of the little facts that’s not widely known is that the SEC typically publishes all sorts of executive employment agreements for publicly-traded companies.  They’re ready and available for download.

Why might the average person do that? Well, for one, these agreements can sometimes contain the latest and greatest “crowd-sourced” language for executive agreements.  For many companies, attorneys have pored over these types of documents making sure that little nuances get covered and don’t turn into big issues.

Let’s take, for example, a company that’s been in the headlines of late: Ralph Lauren.  The company just named a new CEO — Stefan Larsson — to take the reins of this organization.

But in doing so, the company also sent to the SEC the new employment agreement of Larsson.  You can download it here, free of charge.

It’s a fascinating read into what’s in these agreements nowadays. It contains, a multi-year guarantee of employment, compensation details, a relocation “package”, etc.

But it also provides insight into how one company will handle how the relationship ends. For example, it allows the company to terminate the employee “without cause” at any time.  In such a case, however, there is also a draft severance agreement that would kick in with the following provision:

[T]he Corporation shall: (a) beginning with the first payroll period following the fifty-second (52nd) day following the date of termination of Executive’s employment pay the Executive, in accordance with the Corporation’s normal payroll practice, a monthly amount equal to one-twelfth (1/12th) of 400% of Executive’s Base Compensation, as in effect immediately prior to such termination of employment (and without giving effect to any diminution that is the basis for the Executive to resign for Good Reason), for the two-year period commencing on the date of such termination (the “Severance Period”)….

If you’re wondering, 400% of his current salary is $6 million per year.  So, putting it all together: $12M severance payable over two years.  And that doesn’t include the other benefits, stock awards, etc.

There’s much more to the agreement, including a non-compete provision that prohibits Larsson from participating in a “business engaged in the designing, marketing or distribution of premium lifestyle products”.

Ken Adams, of Adams Drafting, has much more on retrieving such agreements. The easiest way is through a paid service, but with a bit of sleuthing, the agreements are free and can be used for both drafting ideas and concepts.

senate2003While I normally make my year-end reflections at, well, year end, I can’t help but take this moment to see the big picture: We’re hearing an awful lot about restrictive covenants.

These covenants — often in the shape of non-compete clauses or non-solicitation (of employees or customers) clauses — have become popular because companies are looking to protect their financial interests.

Connecticut — despite its reputation for being anti-business — still has relatively strong protections for employers who want to use these clauses for their employee.

But these clauses are coming under attack more and more as their use becomes more widespread.

Jay Wolman, on The Legal Satyricon, noted that non-disparagement clauses in separation agreements may be one area where courts are reluctant to enforce. As a result, employers may want to use severability clauses to have the agreements upheld even if one provision is overbroad:

These clauses are very common, but likely are not long for this world.  In the interim, employer counsel may want to rethink the standard severability clause.  Although employers are certainly keen on obtaining as much a release as possible, it may be time to reconsider whether the agreement should survive if the former employee can simply ignore these clauses.

The ABA Journal of Labor & Employment Law also recently published an article on “Developing Trends in Non-Compete Agreements and Other Restrictive Covenants.” As the authors note, courts still tend to enforce the covenant “if it protects a legitimate business interest, the employee received consideration for the covenant, it is narrowly tailored, and the time and territorial limitations are no greater than necessary to protect the employer’s business interests.”

Despite this, the authors are quick to highlight the fact that each state interprets such things differently.

The New York Times even last year noted the trend of employers using these clauses more.  And not in a good way.

With this publicity in mind, Connecticut is again taking the lead — at least from a federal perspective.

Slate reported last week that Senator Chris Murphy introduced legislation that would ban non-compete agreements altogether for workers who make less than $15 per hour.

It would also require companies to let potential hires know ahead of time that they will be required to sign a non-compete agreement.

The bill, called the Mobility and Opportunity for Vulnerable Employees Act (MOVE) is also co-sponsored by Connecticut’s other senator, Richard Blumenthal.

At a press conference, Senator Murphy said that the bill was necessary in a free labor market.  “If workers can’t go to a competitor for a promised higher wage, then the market fluidity — the labor fluidity that creates upward pressure on wages — disappears,” Murphy said. “If workers are locked into jobs because of non-compete clauses, then there is no reason for companies to raise their wages.”

Without bi-partisan support, the odds of this bill passing are somewhere between never and no.  But don’t be surprised if we see this pop up again at a state level in the next legislative session.

My colleague Chris Engler reports today on a new Connecticut Appellate Court case that focuses on a often misunderstood concept in employment contracts — the need for “consideration”.  What was it that Dire Straits’ sang about in the 1980s? Getting “Money for Nothing”?

We’ve all been told that you can’t get something for nothing.  That lesson was reiterated in a new case by the Appellate Court due to be officially released next week. 

The Facts

As told by the Court, the facts of the case,  Thoma v. Oxford Performance Materials, Inc., revolve around the employer’s attempts to attract investors. 

One investment company told the employer, Oxford, that it wanted assurances that key personnel would not leave.  Oxford dutifully entered into employment contracts with various employees, including Lynne Thoma.

The details of the contracts are important.  This first employment contract gave Ms. Thoma a higher salary, job security (termination could only be with 60 days’ notice), and a severance package.  In return, Ms. Thoma promised not to leave during the contract period and not to work for a competitor for six months after leaving.  Ms. Thoma signed this contract.

 At this point, both parties had gotten a benefit, and all seemed well.

But then a second investment company informed Oxford of its dissatisfaction because the employment contract was “too strong.”  So Oxford went back to the drawing board and crafted new contracts.

 Ms. Thoma’s second contract was quite different.  It removed all of the monetary elements, including the salary increase.  The new contract also allowed Oxford to fire Ms. Thoma without notice or cause.  Finally, it prohibited Ms. Thoma from working for a competitor.  (The length of this prohibition was unclear.  If you’re a contract jargon junkie, I recommend reading the court’s analysis in full.) 

Nevertheless, Ms. Thoma went ahead and signed this contract as well.

A year later, Oxford fired Ms. Thoma.  She demanded the benefits from the first contract.  Thus commenceth this case.

Is the Second Contract Enforceable?

Ultimately, both the trial court and the appellate court sided with Ms. Thoma, concluding that she didn’t receive any consideration in exchange for the sacrifices she made in the second contract.  In other words, she gave up some perks without getting anything in return.

Continue Reading “Consider” This Important: Employment Contracts Are a Two-Way Street

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.

In the July/August issue of the Connecticut Lawyer magazine, attorney Joseph Blyskal has the first of a two-part article on the state of restrictive covenants in employment agreements in Connecticut.  I’ve talked about this several times before (most recently earlier this summer), but the Connecticut Lawyer article is recommended reading as well (it’s behind a paywall).

It’s worth reviewing a few key points that can be derived from the article.

First, the author concedes that there has been a lack of controlling cases from any of the key appellate courts lately.  He readily admits that the recent cases do nothing to change the “welll-established standards governing enforceability of restrictive covenants in employment agreements.”

And what is that standard? Over 50 years old, it remains a fact-specific inquiry that “requires the actual impact of particular arrangements on competition [to] be examined to determine whether they have a pernicious effect on competition and lack any redeeming virtue.”

The article then goes on to discuss how various cases apply the factors that courts use to decide whether or not restrictions are reasonable.  Employers are fairing in the middle on a cursory review of the cases.  Where the restrictive covenants are in writing and are not overreaching, courts have upheld them, but too often employers try to enforce overbroad provisions or, in one instance, try to create restrictions after-the-fact.

Another takeaway from the article is the observation that claims are also being made lately on a related law: The Connecticut Uniform Trade Secret Act (CUTSA).  The author teases that this will be discussed further in part two, which will be published later this month.

All told, for those interested in the subject, the article provides a good recap of the state of affairs for restrictive covenants.

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.