Reprinted with permission from the February 26th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.
At the end of 2017, legislators in Pennsylvania proposed legislation to ban noncompete agreements. The proposal is consistent with a legislative trend in other states. In New Jersey, the Senate proposed a bill (Senate Bill 3518) that would place limits on the ability to impose noncompetes (there is a similar Assembly Bill, A5261). Both of these bills reflect already existing challenges in drafting and enforcing restrictive covenants.
Pennsylvania’s House Bill 1938 was referred to the Labor and Industry Committee on November 27, 2017. The Bill recites a declaration of policy that reads like a defendant’s brief in a preliminary injunction case. It states, summarizing, that the Commonwealth has an interest in the following: allowing businesses to hire the employees of their choosing; lowering the unemployment rate; allowing employees to make a living wage; allowing employees to “maximize their talents” to provide for their families; promoting increased wages and benefits; promoting innovation and entrepreneurship; promoting unrestricted trade and mobility of employees; allowing highly skilled employees to increase their income; attracting high-tech companies; disfavoring staying in jobs that are not suited to qualifications; and disfavoring the practice of leaving the Commonwealth to seek better opportunities.
The Bill defines a “covenant not to compete” broadly as an agreement between an employer and employee that is designed to impede the ability of the employee to seek employment with another employer. Interestingly, the Bill does not seem to distinguish between a non-solicitation restriction and non-competition restriction. The Bill prohibits all “covenants not to compete,” and does not allow a court to rewrite the covenant not to compete to make it enforceable.
There are exceptions: “reasonable” covenants not to compete that relate to an owner of a business; covenants not to compete involving a dissolution or disassociation of a partnership or a limited liability company; and “reasonable” covenants not to compete that were in place prior to the effective date of the statute. One presumes that previous case law regarding what constitutes a “reasonable” restriction on competition will apply. The Bill would allow an employee to recover attorneys’ fees and damages upon prevailing in a suit brought by the employer related to the enforcement of a covenant not to compete.
The historical reluctance of courts to enforce restrictive covenants as written has certainly impacted how and when employers use such documents. Employers (with their attorneys) have attempted to draft documents that a court will enforce, and given careful thought to filing suit in the event of a breach. This Bill, however, would change that calculus dramatically; not just because of the outright ban on arguably both noncompete and nonsolicitation agreements, but also because of the attorneys’ fees provision. Employers who get it wrong will pay attorneys’ fees and damages, including punitive damages, to the employee. It may no longer be wise to file preliminary injunctions as a deterrent or a means to a resolution. If passed, this Bill would require employers to focus on two important concepts going forward, one legal, and one not legal: retention of key employees and protection of trade secrets.
The Bill remains with the House Labor and Industry Committee and does not, at this time, appear on that committee’s schedule.
The New Jersey Bill would also impact the legal and economic strategy of using and enforcing restrictive covenants. Introduced on November 7, 2017, the Bill recites public policy goals with regard to covenants not to compete similar to those recited in the Pennsylvania Bill. The Bill defines a restrictive covenant more narrowly than the Pennsylvania Bill: agreements under which the employee agrees not to engage in certain specified activities competitive with the employer after the employment relationship has ended. The New Jersey Bill does not ban covenants not to compete, but instead imposes a series of restrictions that would seriously impact how noncompetes were enforced and drafted, and would have required employers to pay employees for the period of the restriction. The New Jersey Bill died in committee.
Both Bills reflect the historical judicial reluctance to enforce noncompetes, and change the economics and legal issues related to those agreements dramatically. They are in line with restrictions in other states like California, North Dakota and Oklahoma. Most importantly for practitioners, they reflect that reliance on a well-drafted choice of law provision may not save the day. Case and statutory laws on this particular topic are not really predictable in the usual way. Just by way of example, Massachusetts has eight outstanding bills related to the topic, all of which were the subject of hearing on October 31, 2017, and both Vermont and New Hampshire proposed outright bans earlier this year. Even the results of upcoming elections could change the statutes in any particular state.
These bills proposed late in 2017 reflect current challenges in drafting and enforcing agreements that are enforceable and highlight the importance of considering each decision carefully. Drafters must consider carefully the specific interest an employer is attempting to protect, but even the most careful drafting may not survive new legislation. It will be interesting to see whether, and in what form, legislatures may codify some of these challenges in the future.
Patricia Collins is a Partner with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on employment, commercial litigation, and health care law. To learn more about the firm or Patricia Collins, visit www.ammlaw.com