Part 2 of our Noncompete Series will focus on employers. Noncompetes, when well drafted, are a powerful tool to protect customer relationships, confidential information, trade and training secrets, and key employee relationships. But, the law does not favor these agreements, so drafting requires care, and, as a practical matter, timing is everything.
While noncompetes are disfavored and maligned, they do serve useful purposes for certain employers. There are two types of restrictions that such agreements can impose: general prohibits on certain kinds of competition; or, prohibitions on soliciting customers, vendors, employees, contractors, or other valuable relationships. For the most part, restrictions on soliciting customers, employees and other key relationships are easier to enforce. They allow the employee to continue to work, and protect those relationships for the employer. For some employers, these restrictions, tailored to their business and in place for a sufficient period of time, are enough. Generally, these restrictions tend to last a year or perhaps two. Employers will need to weigh the dangers of making the restriction too long, and thus unenforceable, as against the time it takes for those relationships to go stale.
Restrictions on competition generally are another matter. The general principle applied by the court is this: a court will not enforce the restriction if it is not designed to protect a legally recognized protectable interest, renders an employee unable to pursue his chosen profession, or appears designed to eliminate fair competition. The court will only act to protect the following interests: trade secrets or confidential information, specialized training the employee received from the employer, or customer good will developed using the employer’s resources. Given these competing factors, it is best to narrowly tailor the restriction to the employer’s business. An employee is more likely to comply with such a restriction (thus avoiding court), and a court is more likely to enforce it as written.
Employers next must consider when to ask employees to sign noncompetes. These agreements are enforceable when signed at the beginning of the employment relationship. A noncompete executed by an employee after the employee has worked for the employer for a period of time is not enforceable unless accompanied by a raise or promotion, or some other benefit. This creates a practice problem for employers. Often, a noncompete is not required at the beginning of employment, but circumstances change: employees are promoted, the nature of the business changes, the employer becomes more sophisticated about its internal procedures, for example. A skilled employee with options in the marketplace may very well refuse to sign such a restriction where the new consideration offered is simply not worth it. So, for example, while a bonus of $500 is enough to make the agreement legally enforceable, it may also not be enough to cause the employee to sign. This creates a difficult situation for the employer – should the employer terminate and lose the key employee, or allow the employee to stay without a noncompete?
Creating a noncompete program for employees is complex, and many of the issue are interrelated. In addition to the legal concerns, employers must consider what concerns and relationships truly require protection, as well as retention and morale issues. We have helped many employers sort through these issues and are uniquely equipped to help businesses navigate difficult noncompete issues.
A recent Washington Post article proclaimed that “even janitors have noncompetes now.” New Jersey and Pennsylvania are considering legislation to regulate the terms and enforceability of documents that restrict employees’ ability to compete with their former employees. "Noncompete Litigation Lessons from the 10th Circuit". These restrictions require discussion and attention: they impact the economy, employee mobility, and the trade secrets and good will of businesses. In the coming weeks, we will explore issues relating to noncompetes in order to shed some light on this complex employment law topic, and offer guidance to both employers and employees grappling with the potential risks and consequences of missteps in these agreements.
This week, let’s start with the basics.
Pennsylvania law recognizes that an agreement that restricts the ability to compete is a restraint on trade, and courts should construe them narrowly. Such agreements are only permitted in two contexts: where they are ancillary to the employer – employee relationship (including independent contractor relationships), or where they are ancillary to the sale of a business. The restriction must be reasonable in terms of scope, geography and time. A court will review whether the restriction in the agreement is narrowly tailored to address certain legally protectable interest, such as good will, trade secrets or specialized training.
Such agreements, as with all contracts, must be accompanied by consideration. In the context of employment-related noncompetes, continued employment will not suffice. Instead, the noncompete must be executed at the beginning of the employment relationship, or, if signed during the employment relationship, accompanied by additional consideration such as a promotion, raise or bonus.
Noncompetes come in many forms: restrictions on working for competitors or setting up a competing business; restrictions on soliciting or accepting work from customers, clients, vendors or suppliers; restrictions on working as an employee for a customer, client, vendor or supplier; and restrictions on soliciting employees away from the employer. Limitations on solicitation are generally more enforceable than blanket restrictions on competition. Some noncompetes are accompanied by a period of severance pay, commonly referred to as “garden leave”. Some agreements include provisions for the employer to release an employee from a noncompete under certain conditions.
When an employee breaches a noncompete, the employer has a powerful weapon to enforce the document: the employer can request an emergency order from the court prohibiting the employee, and even the employee’s new employer, from engaging in activity in breach of the agreement. The court proceeding that results in the emergency order, called a preliminary injunction, usually occurs quickly, and such litigation is expensive and stressful. Often, noncompete agreements have provisions that require the employee to pay the employer’s legal fees in the event of a breach. A court is free to “blue pencil” the noncompete. This means that the court can rewrite the restrictions in a manner that is reasonable and consistent with the employer’s legally recognized protectable interests.
In the next installment of my Navigating Noncompetes series, you will see how to apply some of these basics to examine the issues that employers should consider in drafting and enforcing noncompetes.
Reprinted with permission from the August 18th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.
A recent case from the United States District Court for the Tenth Circuit, First American Title Insurance Company, et al. v. Northwest Title Insurance Agency, et al., no. 17-4086, illustrates nicely the complicated issues faced in noncompete litigation, and the risks a good agreement can prevent. Although the case arose in the United States District Court for the District of Utah, the issues confronted and legal principles cited arise frequently under Pennsylvania law.
The individual defendants were employed by First American Title Insurance Company, and had signed various restrictive covenants of one year in duration. All individual defendants were subject to a code of ethics and employee handbook that required employees to use office equipment for company business only, and barred outside activity competing with First American. First American Title Company acquired the stock of First American Title Insurance Company pursuant to a Stock Purchase Agreement. Defendant Smith created defendant Northwest Title Insurance Company, and then quit his job with First American. The day after Smith resigned defendants Carrell and Williams resigned and all individual defendants took positions at Northwest Title Insurance Company, along with twenty-five other employees over the next two weeks. Litigation ensued, and defendants suffered a large jury award at trial.
Lesson 1: File petitions for preliminary injunction early, and make sure to have a tolling provision in the agreement.
The First American District Court denied the plaintiff’s motion for a preliminary injunction after a hearing, finding that there was no irreparable harm. Notably, the individual defendants resigned in March of 2015, and their restrictive covenants, which did not contain tolling provisions, terminated in March of 2016. Plaintiffs filed the petition for preliminary injunction in January of 2016, with only two months remaining on the restrictive covenants, and the motion was not heard until September 2016. The case then proceeded to a trial, resulting in the appeal addressed by the Tenth Circuit. An injunctive order entered early in a case tends to change the dynamic of a case going forward, providing opportunities for sanctions and contempt motions, and an incentive to settlement. Certainly, defendants enjoyed an early victory that rendered this case solely about damages. Indeed, this may well have been the strategy: part of the court’s reasoning on the preliminary injunction was that most of the damage had already been done, in light of the quick transfer of customers and employees.
A preliminary injunction is only powerful when filed early, and it might be worth considering foregoing the motion in certain circumstances, where the tactical advantages of early filing are lost. Most importantly, a tolling provision in the document might have changed the outcome: drafters must include a provision that extends the duration of the restrictive covenant where the employee is in breach.
PENNSYLVANIA’S PROPOSED RULEMAKING UNDER THE PENNSYLVANIA MINIMUM WAGE ACT
Reprinted with permission from the August 18th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.
In 2016, the United States Department of Labor proposed changes to regulations regarding exemptions from the overtime and minimum wage requirements of the Fair Labor Standards Act (“FLSA”). The proposed changes nearly doubled the salary requirement to qualify for these exemptions. Employers hurried to change policies and reclassify employees in order to meet the December 31, 2016 deadline to comply with the new salary requirement. In late 2016, a federal court imposed an injunction on the imposition of those rules, and there the new regulations died (more at the hands of the Trump administration than as a result of legal challenges). Among other observations, the federal district court for the Eastern District of Texas concluded that the injunction was necessary because the new salary requirement was so high that it rendered the duties test “irrelevant.”
The proposed change was dramatic, and would have required significant policy and personnel changes. Now, Pennsylvania is taking on those salary requirements in a less dramatic, but no less significant way.
The sale or merger of a business often uncovers employment problems that may scuttle the transaction, or impact the value of the business. In my employment law practice, I’ve seen a pattern of common employment issues businesses face when they are contemplating a transaction, or that emerge during due diligence. Below are the five most common of those issues:
1. Classification of employees as “exempt” or “nonexempt” under federal and applicable state law; and time clock and hourly pay policies, and compliance with federal and state overtime rules;
2. Classification of workers as independent contractors or employees;
3. Evaluation of benefit plans to ensure compliance with plan documents and federal benefits law, and evaluation of policies related to unregulated fringe benefits, such as vacation pay or sick pay;
4. Evaluation of whistleblower and harassment and discrimination complaint procedures;
5. Evaluation of employment contracts and restrictive covenants to ensure that the restrictions included therein will protect the seller and will inure to the benefit of the buyer.
A thorough review of employment policies and procedures and contracts will eliminate trouble in the process. AMM attorneys have experience guiding employers through these issues as part of our clients’ transactions. We can help employers address the crisis when it emerges as part of due diligence. More importantly, we can help employers improve their policies and contracts to maximize value and streamline transactions.
Employers work very hard to retain senior, key and talented employees. In the past, we’ve discussed how workplace culture helps to retain talent, and we’ve seen an increased employer focus on those programs. But the truth is that often what causes an employee to stay, and complicates an employee’s exit, are basic compensation programs: competitive salaries, reasonable health insurance, and stock options or other compensation programs that vest over time. These are difficult issues regardless of the reason for the highly compensated employee’s exit.
Of course, any executive is reluctant to walk away from a competitive salary. For executives who resign, this becomes the main bargaining chip with a new employer, and the main area of risk if they are retiring or starting a new business. But, when an executive is involuntarily terminated, our first goal in representing those executives is protecting those benefits. Executives are often eligible for severance programs that will continue their salary for a period. We examine whether the executive is eligible given the circumstances surrounding the termination, and the amount of severance due. Where there is no formal severance program, an executive should consider negotiating a severance package, depending on the circumstances of the termination. For example, most actionable cases of age discrimination occur at these levels, because the more highly compensated employees are also the oldest employees. This may provide some leverage to negotiate a severance.
Health insurance and other benefits are often included in those severance programs. However, if there is no severance program, all employees are entitled to continuation of health insurance under the statute commonly known as “COBRA.” This coverage is available at the employee’s cost unless the employee is terminated for “gross misconduct”. While this coverage is expensive, it does provide a way to continue coverage for up to eighteen months.
The most complicated of these issues, though, is the issue of stock options and other compensation that vests over time. Especially after a long period of employment, executives may find themselves with valuable stock options that vest three or four years in the future. When this executive is terminated, the loss of those unvested options can represent the loss of significant funds. Rarely do such plans allow an employee to vest if he is no longer employed, so there is little room for negotiation on this point. Similarly, when resigning, the executive must consider his timing, calculate what he is leaving “on the table” and perhaps negotiate this loss with a new employer.
AMM has experience navigating these complicated exit issues for executives. We can help a terminated employee protect some of these benefits, and work with resigning employees to navigate an exit in a way that makes economic sense.
Reprinted with permission from the June 25th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.
The Supreme Court settled a disputed question regarding arbitration clauses as they apply to class and collective actions in Epic Systems Corp. v. Lewis, 584 U.S. ___, (2018). The matter before the Court included three disputes that raised the same issue, but the Court focused on the facts of Ernst &Young LLP v. Morris, a collective action under the Fair Labor Standards Act (“FLSA”), in its opinion. Justice Gorsuch’s opinion for the 5-4 majority professes to focus only on the law, and the opinion chides Justice Ginsberg, writing for the minority, for a focus on policy over precedent. However, both the majority and dissenting opinions reflect a policy dispute: the preference in the law to enforce arbitration clauses versus the historic view of certain employment-related statutes as remedial in nature. One need only reflect that this Court, in Encino Motorcars LLC v. Navarro, rejected the notion that remedial statutes such as the FLSA are subject to any special treatment to know where the Court would land on this particular policy dispute. The Court’s holding that arbitration clauses in employment agreements are enforceable even if they result in a waiver of the right to bring a class or collective action is a blow to employee’s rights under the FLSA. The case also provides a drafting lesson for practitioners.
Morris was an employee of Ernst & Young, and entered into an employment agreement that included an arbitration provision. The arbitration provision stated that it applied to any disputes that might arise between employer and employee; that the arbitrator, chosen by the employee, could grant any relief that could be granted by a court; and that disputes pertaining to different employees would be heard in separate arbitration proceedings.
After his employment ended, Morris sued Ernst & Young, claiming a violation of the FLSA. Specifically, Morris claimed that Ernst & Young misclassified him as exempt under the professional exemption, and that he was therefore owed overtime pay. Morris also sought to state his claim as a “collective action” under the FLSA, as permitted by 29 U.S.C. § 216(b). Predictably, Ernst & Young filed a Motion to Compel Arbitration, and the motion was granted. The Ninth Circuit reversed, and Morris appealed to the Supreme Court.
At issue in the appeal are three statutory schemes: the FLSA “collective action” provision; the National Labor Relations Act, 29 U.S.C. § 151 et seq. (“NLRA”); and the Arbitration Act, 9 U.S.C. § 2. The FLSA permits a “collective action” for violations of the Act. An aggrieved employee may file the action on behalf of himself, and “other employees similarly situated,” provided those other employees provide and file their consent to join the action. The NLRA, relevant to this matter, prohibits an employer from barring employees from engaging in “concerted activity”, as that term is defined in the statute. 29 U.S.C. § 157. The Arbitration Act requires courts to enforce arbitration agreements as written, but, relevant to this matter, includes a “savings clause.” 9 U.S.C. § 2. The savings clause permits a court to refuse to enforce an agreement to arbitrate upon such grounds as exist at law or in equity for the revocation of any contract. Morris argued that the court could not enforce the arbitration agreement under the savings clause of the Arbitration Act. The argument goes that, when applied to this FLSA collective action, the agreement to arbitrate violates the NLRA because it bars the concerted action of pursing claims as a collective action. More generally, the employees argued that the enforcement of an arbitration provision in this context results in a waiver of the right to bring a class or collective action.
Some background informed the Supreme Court’s treatment of these three disputes: in 2010, the National Labor Relations Board expressed the opinion that the validity of agreements to arbitrate “did not involve consideration of the policies of the NLRA.” In 2012, the NLRB expressed a different view, arguing that the NLRA “nullifies” the Arbitration Act in these types of cases. Thereafter, some circuits followed the NLRA’s 2012 view, while the Solicitor General took an opposite view in these cases before the Court. The Supreme Court granted certiori “to clear the confusion.”
However, the Supreme Court’s opinion, authored by Judge Gorsuch for the majority, recognizes little confusion on the issue. The Court held that the Arbitration Act’s savings clause does not permit a court to refuse to enforce an agreement to arbitrate, and that there is no conflict between the NLRA, the FLSA and the Arbitration Act. Indeed, the Court noted that the problem with the employees’ argument was “fundamental”: the savings clause applies only to defenses that apply to any contract, and not to defenses that apply only to arbitration. Morris’ argument was not that his entire employment agreement required revocation on grounds of illegality or unconscionability, but that the arbitration provision required revocation. Because Morris’ gripe was with the arbitration clause itself, and not the entire agreement, says the Supreme Court, the savings clause does not apply.
The Supreme Court also rejected Morris’ argument on the basis that, when confronted with two federal statutes addressing the same topic, the Court is not “at liberty to pick and choose” between them, and must find a way for the statutes to live together. The NLRA, the Court noted, does not mention class or collective actions, and does not refer to the Arbitration Act at all, which was enacted prior to the NLRA.
Judge Gorsuch notes that the employees’ choice not to argue that the FLSA’s “collective action” provisions require the application of the Arbitration Act’s savings clause demonstrates the flaw in the employees’ position. Judge Gorsuch notes that the Supreme Court has already held that the FLSA collective action provisions do not prohibit individualized arbitrations, and that every circuit to consider the question has agreed.
The Court does not stop there: it offers arguments under the predecessor to the NLRA, takes on the issue of deference to agency determinations, and chides the dissent for its focus on policy over precedent. Justice Ginsberg notes in a dissent that the majority’s decision is “egregiously wrong.” In short, neither side recognizes any confusion in the issue, and they arrive at completely different conclusions based on a policy preference. And, practically speaking, both sides are correct about the stakes for employees. As Justice Ginsberg notes: “individually their claims are small and scarcely of a size warranting the expense of seeking redress alone.” For employees, collective actions provide a way to address FLSA violations in a meaningful and cost-effective way. For employers, such actions are expensive and disruptive. The threat of such claims is an incentive to comply scrupulously with the FLSA. The case thus includes a simple but important lesson for those of us who prepare and review employment agreements. The arbitration agreement at issue in the Morris case, for example, included a requirement that disputes pertaining to different employees would be heard in separate arbitration proceedings. Given the Supreme Court’s clear approval of such arrangements, this becomes a powerful clause in an employment agreement. An agreement that eliminates that risk is valuable to employers, a blow to employees’ rights under the FLSA, and now, unquestionably enforceable.
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.
I recently had the opportunity to speak at the Central Bucks Chamber of Commerce’s health and wellness event, “Well Employees = Well Business: Best practices and Legal Considerations” along with Megan Duelks, CoE Employee Health Innovations at Johnson & Johnson. Ms. Duelks’ discussion of wellness programs at Johnson & Johnson along with the excellent questions from the attendees highlighted that a workplace with good risk management is also a positive, professional and productive workplace. Good risk management should include three important features, no matter the size of the employer: professionalism, fairness, and a focus on employee performance.
Professionalism means that an employer has in place the important features that protect both employees and employers: a handbook, policies that prohibit discrimination, harassment and retaliation, and a good complaint procedure. Professionalism also requires that complaints are taken seriously, investigated properly and redressed in a meaningful way.
Fairness requires that those policies are followed consistently for each employee, and that exceptions are made for good business reasons.
A focus on employee performance helps to meet these goals. At the seminar, employers were concerned about how to communicate with an employee in crisis. The goal is to help the employee, but protect the employer from unnecessary liability. Having clear policies in place will help to meet these goals. Where the crisis is impacting the employee’s performance, this is where the discussion must start. A focus on performance, which includes anything from attendance to the quality of work, creates a platform for a professional conversation about how to address the issue. An employer is always free to end such a discussion by identifying the resources the employer offers for employees facing personal, family, or health issues.
In my practice at Antheil Maslow & MacMinn, I have assisted many employers to put a program in place that improves culture, manages risk, and creates a framework to address employee crises.
I had the pleasure of revisitng the issue of training to avoid or address harassment and discrimination in the workplace at the Lower Bucks Chamber of Commerce ECONference 2018 on May 23, 2018. The questions from participants reminded me that training is a valuable tool not only for risk prevention, but also to improve workplace culture.
Training has become a “check the box” activity: the employer gets to say that it provided training, in the event of a claim. The employees are required to attend in order to keep their jobs, and so they attend and zone out. Employer and employees are going through the motions. The lawyers told them to train, so the employer is training.
Here’s what I’ve learned: the serious offenders, those who engage in serial harassment, inappropriate relationships or even assault, are going to engage in that behavior no matter what training you provide. An employee who lacks the insight to know that certain behaviors are unacceptable (everywhere, really) will not have an epiphany during mandatory employee training. One-on-one training often helps in these situations, but not always, and not fundamentally (that is, the employee will know what to do to stay employed, but will not really care that the behavior was inappropriate).
Employers should provide training – it is good risk management for certain employers. But, perhaps it should be a more sincere activity on both sides: employers should consider more interactive training, smaller groups and individualized training for departments. Employers should engage in self-evaluation of workplace culture prior to planning the training.
Further, if the goal is prevention of harassment, hostile work environment claims or other unacceptable workplace behaviors, generalized training is not always the answer. Instead, employers should remember that culture comes from the top. If officers, supervisors and managers maintain professionalism, it sets the tone. It might be valuable to warn and provide one-on-one training to managers who do not demonstrate professional behavior, but in the end, appropriate workplace behavior should be a qualification for any leadership role.
No lawyer will ever advise an employer not to provide training, but perhaps it is time to be more thoughtful about what training looks like for specific employees. Avoiding litigation cannot be the only goal, or the training will never work. I frequently work with employers to come up with meaningful training plans that comply with the law, and are appropriate for their business.
Reprinted with permission from the April 18th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.
The Supreme Court’s decision in Encino Motorcars, LLC v. Navarro interprets a very specific exemption to the overtime rules imposed by the Fair Labor Standards Act, 29 U.S.C. 201, et seq. (“FLSA”), but the Court’s language and reasoning have game-changing ramifications. The Court’s rejection of the principle that courts should narrowly construe exemptions to the FLSA turns decades of FLSA caselaw on its head.
The facts of Encino Motorcars are deceptively narrow. Employees classified as service advisors for a car dealership challenged the car dealership’s classification of the service advisors as exempt from the FLSA. The FLSA requires that employers must pay overtime to employees who work more than 40 hours in a week. 29 U.S.C. § 207(a). The dealership claimed the exemption under a statutory exemption that applies to car dealerships. 29 U.S.C. § 213. Specifically, the section in question exempts from overtime pay requirements:
Any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers.