Articles Posted in Noncompete Agreements

Two days ago, the Federal Trade Commission (FTC) issued its “Final Rule” banning non-compete clauses in employment. Until now, the FTC never officially declared that such clauses constituted an “unfair method of competition.” The Final Rule seeks to upend centuries of state law governing the use of non-compete clauses in employment, including state laws that already limit or ban their use. The federal government’s encroachment into traditional state law is not necessarily unprecedented, but in this case, will likely fail.

Read on for more information in this blog post.

This week, the New York State Assembly passed a bill identical to a bill passed by the Senate earlier this month banning non-compete agreements in employment. The bills now await Governor Hochul’s signature.  If she signs them, the law will take effect 30 days later. Read on for more information on the non-compete ban.

The New York State Senate recently passed a bill barring noncompete agreements in employment. If the Assembly adopts the bill within the next few weeks, it will be sent to Governor Hochul for signature. It’s likely that the bill won’t make it passed the Assembly, but if it does it will have enormous implications in New York and beyond. Take a look at the text of the bill: S3100A.

 

 

Earlier this month, New York Attorney General Eric T. Schneiderman’s office announced that it had secured an agreement from Examination Management Services, Inc. (“EMSI”) to stop using non-compete agreements for most of its New York employees.  EMSI is a Texas-based medical information services provider that required all of its New York employees to sign off on non-compete agreements, without regard to whether they had access to trade secret or other confidential information.  The non-compete agreement that EMSI required its New York employees to sign prevented them from working for a competitor for 9 months after leaving EMSI, within 50 miles of any location in which the employee worked for EMSI.  According to the Attorney General’s office, most of EMSI’s New York employees worked in non-senior level positions and mainly traveled throughout New York to conduct routine physical examinations.

Following a complaint by a former EMSI employee, whose job offer from a competitor was rescinded because of her non-compete agreement, the Attorney General’s office convinced EMSI to release the former employee from her non-compete agreement, not require non-senior level employees to sign them, and to notify current employees and former employees who left within the last 9 months that the non-compete agreement would no longer be in effect.

According to Attorney General Schneiderman, “[r]estricting rank-and-file workers from being able to find other jobs is unjust and inappropriate. . . .  Workers should be able to change jobs without fear of being sued by their prior employer.”

In this age of mergers and acquisitions, and increased employee mobility,  it is critical that employers and employees understand their respective noncompetition obligations.  A Southern District of New York court recently applied the “reasonableness” standards governing enforceability of non-competition agreements, or restrictive covenants, to no-hire agreements.  Specifically,in Reed Elsevier Inc. v. TransUnion Holding Company (S.D.N.Y. 13-CV-08739), the court found that the agreement was not necessary to safeguard a “protectable interest” of Reed Elsevier, and was, therefore, unenforceable.

In TransUnion, the parties had entered into an agreement prohibiting TransUnion from hiring certain senior management employees of Reed Elsevier for a time.  Ultimately, TransUnion hired the former Chief Technology Officer of Reed Elsevier, after TransUnion purchased the assets of the employee’s subsequent employer, and assumed the former employee’s employment contract.  It’s not clear to what extent the court was influenced by the fact that the employee had previously left Reed Elsevier to work for another employer (not TransUnion) and ended up becoming a TransUnion employee through a bankruptcy sale of assets.  Thus, the court considered whether under New York law, the no-hire agreement was (1) reasonable in time and area; (2) necessary to protect the employer’s legitimate interest; (3) not harmful to the public; and (3) not unreasonably burdensome to the employee.

Although the court found that the time restriction was unreasonable, because under the circumstances of the case, it would have prevented the employee from working for TransUnion for a period extending 31 months after his departure from Reed Elsevier, the court refused to shorten that restriction to a more reasonable period  because Reed Elsevier could not prove that the agreement was necessary to protect a legitimate interest.  Under New York law, a legitimate interest entitled to protection through a restrictive covenant would include (1) trade secrets; (2) confidential customer information; (3) the employer’s client base; and (4) irreparable harm where the employee’s services are unique and extraordinary.  The court found that none of these interests was at stake in this case.

New York Governor Paterson recently signed the Broadcast Employees Freedom Work Act which restricts employers in the broadcasting industry from conditioning employment on the signing of noncompete agreements.

Noncompete agreements restrict an employee’s ability to work for a competitor for a specified period of time following termination of employment. In New York, such agreements are upheld provided that they are reasonable in scope, time, and no more restrictive than necessary to protect an employer’s legitimate interest– such as confidential information. Such agreements in the broadcasting industry had the effect of either requiring broadcasters to move out of their geographical areas or ending their careers.

The Broadcasting Freedom Work Act alleviates this problem by providing that “a broadcasting industry employer shall not require as a condition of employment, whether in an employment contract or otherwise, that a broadcast employee or prospective employee refrain from obtaining employment: (a) in any specified geographic area; (b) for a specific period of time; or (c) with a particular employer” following termination of employment. This protection cannot be waived and would apply to all broadcasting industry on-air and off-air employees excluding those holding management positions.

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