Non-Compete Law Blog

Last week, the Illinois Attorney General filed suit against Jimmy John’s, alleging that the company’s non-competes violate state law. These non-competes prohibit all employees, including sandwich makers, from working during their employment and for two years afterward at businesses within several miles of any Jimmy John’s nationwide that earn more than 10% of their revenue from submarine or similar sandwiches. The complaint alleges that the non-competes do not protect a legitimate business interest such as trade secrets or customer relationships, and it seeks a declaratory judgment that the agreements are unenforceable.

As states continue to struggle with the pros and cons of non-competes, the White House has recently weighed in, siding largely with critics of non-competes.  In Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses, the Obama Administration draws on a recent report from the U.S. Treasury Office of Economic Policy to provide an overview of research on the effects of non-competes as well as states’ efforts to limit their negative effects.

The White House Report acknowledges that non-competes have economically and socially beneficial uses such as protecting trade secrets and incentivizing investment in worker training.  However, the Report notes that these agreements also may have detrimental effects by limiting worker mobility and inhibiting innovation.  Specifically, the Report highlights ways in which workers may be disadvantaged by non-competes, including:

• Low-wage workers and others unlikely to possess trade secrets may be forced to sign non-competes;

• Workers may be asked to sign a non-compete only after accepting a job offer, when their bargaining power is reduced;

• The implications and enforceability of non-competes are often unclear to workers;

• Employers requiring non-competes often do not provide consideration beyond continued employment; and

• Non-competes may be enforceable even against workers fired without cause.

The Report concludes that although non-competes may play an important role in protecting businesses and encouraging innovation and investment in employees, they can also impose significant costs on workers, consumers, and the economy.

The Report marks the Obama Administration’s second recent foray into the realm of non-competes and trade secrets.  The President recently signed into law the Defend Trade Secrets Act of 2016 (DTSA), which provides for the first time a federal civil remedy for the misappropriation of trade secrets, as discussed in detail by our IP colleagues.  Although state legislators primarily hold the power to adopt non-compete reform, the Report indicates that the Obama Administration plans to continue to offer guidance in this area.

Earlier this week, the Joint Committee on Labor and Workforce Development released proposed amendments to the Uniform Trade Secrets Act, which would include the creation of the Massachusetts Noncompetition Agreement Act. The legislation, if enacted, would significantly alter the non-compete landscape, rendering unenforceable or practically unworkable most Massachusetts employers’ non-competition agreements. Here are some of the highlights:

In the last few weeks, Utah and Idaho have each passed bills changing the landscape of non-compete enforceability in strikingly different ways. Utah’s law places further limitations on the use of non-competes. In contrast, the Idaho bill (expected to be signed by the governor shortly) permits greater enforceability of non-competes.

This morning, House Speaker Robert DeLeo announced at a Greater Boston Chamber of Commerce breakfast that the House will be releasing a bill this session that imposes some limitations on non-competes. Although the language of the proposed bill is not yet available, Speaker DeLeo described two key elements:

• Time Limit: The proposed bill would limit non-competes to 12 months in length.

• Notice Requirement: The proposed bill would require that employers inform employees in advance that they will be asked to sign a non-compete, and advise them of their right to seek legal counsel.

A recent decision from a Wisconsin state court serves as a cautionary tale for employers that do not routinely impose or enforce non-compete restrictions consistent with the employee’s role and potential to harm the business.

In Kohl’s Department Stores Inc. v. Janet Schalk, 2015CV001465 (Wis. Cir. Ct. Aug. 11, 2015), Judge Robert Mawdsley denied Kohl’s request for an injunction preventing its Chief Information Officer, Janet Schalk, from joining Hudson’s Bay Company partly on the grounds that Schalk’s non-compete was overly restrictive in light of Schalk’s role in comparison with the non-competes of other employees.  Kohl’s, relying upon its non-compete contract with Schalk barring her from working in a similar position with a competitive retailer for one year, argued that Schalk should be barred from joining Hudson’s Bay, a Canadian department store company, because Schalk “has the playbook, the crown jewels, our entire strategy in her hands.” Schalk argued that the non-compete was too broad and that Hudson’s Bay was not a competitor given its high-end retailing–featuring Saks Fifth Avenue and Lord & Taylor–compared to Kohl’s mid-tier status. Schalk also contended that Kohl’s overstated her role and knowledge of the company’s strategy.

The Boston Bar Association recently held its 7th Annual Symposium on Employee Noncompete and Trade Secrets. In addition to practicing attorneys and an MIT-Sloan professor, the panel included three Massachusetts state legislators – Senators Jason Lewis and William Brownsberger, and Representative Lori Ehrlich – who have each authored pending legislation that would, to varying extents, render non-compete agreements unenforceable in the Commonwealth.

Massachusetts employers and employees have enough to contend with trying to keep abreast of the judicial and legislative fits and starts of non-compete reform within the state, let alone developments in other states. It is important to remember that non-compete law varies widely from state to state, and these variations may come into play if employees are in different states or if a former employee is moving to a new state. Below you will find just a few of the many variances in state non-compete law.