David Harmon: Hi, I’m David Harmon.
Mariya Gonor: And I’m Mariya Gonor,
David Harmon: And we are the Employment Strategists. Welcome to our latest episode Boundaries, the latest on non-competes.
Mariya Gonor: Last time we spoke about the non-competes, the FTC had just passed a rule that proposed a nationwide ban on nearly all non-compete agreements.
Mariya Gonor: Yeah, but what happened since the last episode on August 20th of this year, the U.S. District Court for the Northern District of Texas struck down that proposed nationwide ban, and it was supposed to go into effect on September 4th. But that didn’t happen because of this decision.
Mariya Gonor: I think it’s also important to point out that the judge made this decision in a very dramatic fashion, right? Because that was the second decision by this judge, the initial decision which she promised to us in July, right before July 4th, and she delivered. struck down the rule, but the injunction only applied to the parties in the case. And then the judge promised that there will be a decision on the nationwide injunction, but that did not occur until the end of August. So, a lot of people were sitting around waiting with bated breath to figure out what’s happening with non-compete agreements.
David Harmon: Well, the essence of the ruling is that the court held that the rule was arbitrary and capricious and that the FTC lacked the statutory authority to issue it and to enforce it. What’s going to happen probably is that the FTC is probably going to appeal the decision to the Fifth Circuit Court of Appeals. And it might actually wind up at the Supreme Court. We don’t know.
Mariya Gonor: Oh yeah. I think it’s, it’s a very likely scenario that unless there is a change within the FTC.
David Harmon: Right. And we’ll see about the timing as it relates to the election and then the composition of the FTC. But the rule is at this point, something that we should still consider in the context of non-competes because there is a lot of activity within states as it relates to non-competes and has been up to this point.
Mariya Gonor: So let’s discuss what the current status is. Very frequently we get questions from both employers and employees as to what’s going to happen next. Are employees bound by their existing non-compete agreements? Even though there is a decision that imposed a nationwide injunction, the situation is very much in flux from the perspective of businesses and employees.
David Harmon: Well, I think right now it’s really state-specific. If you look at California, non-competes are unenforceable. They’re unlawful. But I think, to answer your questions, yes, they are.
Mariya Gonor: And maybe, and it depends.
David Harmon: They can still be used, and they are still enforceable, subject to their meets and bounds of those restrictions, and the state laws governing those, imposition of those restrictions.
Mariya Gonor: So, let’s break it down a little bit.
David Harmon: Okay.
Mariya Gonor: For any employer or employee, the first question is, obviously, where are you located and where are your employees located?
David Harmon: Correct. And then looking at the statute that might govern it to see what your non-competes or non-solicitation, non-disclosure, work made for hire, invention and proprietary information, all of these restrictive covenants, what can they say? What is the language that is compliant with the various state requirements?
Mariya Gonor: Yeah, I think you said a very important thing right now, right? The FTC ban only applies to non-compete agreements. restrictive covenants, provided that they’re drafted appropriately, could still bind an employee. And I would argue that in many business scenarios, the other restrictive covenants are far more important than the actual physical non-compete agreement. So, let’s start from the top.
David Harmon: Okay. Okay, so with non-competes, the three components are the scope. The duration and the geographic range of the restriction.
Mariya Gonor: Yes. And even when we are looking in states that still allow non competes as a concept, right, we still need to look to make sure that the actual terms of the agreement are enforceable because many states may not enforce it if the geographic scope, like you said, or the temporal scope is unreasonable.
David Harmon: So, if we’re looking at what businesses, what employers should do in constructing these non-competes to make sure that they’re enforceable or give themselves the best chance of enforceability is to look at the reasonableness for the business purpose. What are they trying to accomplish as opposed to imposing a blanket universe-wide ban on competition.
Mariya Gonor: Outside of any FTC rule, if you have a business that, if they have an non-compete that says that an employee simply cannot practice in their chosen profession for X number of years after working for you, and there is no compensation involved in connection with that, it would be hard to enforce something like that I think in any court.
David Harmon: Right, I think one of the standards that courts would look at is whether it imposes following up on what you just said, Mariya, is an undue hardship. On the employee as to whether that is a restrain of trade and not allowing that employee executive or otherwise to work in, in the field that they’ve been working in or that they’re trained to work in and the likelihood is in that situation, it would not be fully enforceable, could be enforceable in, in whole or in part or thrown out completely.
Mariya Gonor: There has to be some protectable business interest. It can’t just be, we only want you to work for us and never work for anybody else. It has to be, if the business has a protectable interest, an employee has been exposed to certain trade secrets or certain business information that could be used in an unfair advantage to compete with that business, in the geographic area.
David Harmon: Right, so all of this has to be reasonable and certainly talking about the elements that we mentioned before scope, duration, and geographic range.
Mariya Gonor: And the more targeted these three factors are, the more likely a non-compete has a chance of withstanding an enforceability challenge.
David Harmon: So, you’re saying that really the mantra should be specificity detail.
Mariya Gonor: Location, location, location.
David Harmon: limit, limit, limit.
Mariya Gonor: duration, duration, duration.
David Harmon: You call it whatever you like, but the more detailed it can be, the more restrictive, less broad, the better.
Mariya Gonor: Yes. Another question that frequently comes up is you’re an employee. You’ve been working with a company for two years. All of a sudden your boss comes to you and says, Here is a non-compete agreement. I need you to sign this, and if you fail to sign it, we will fire you tomorrow. Can that be done under any circumstances? Is this acceptable? What are the consequences?
David Harmon: Well, I would make the argument, if I’m representing the employee, that this was not a term, a condition, that was negotiated at the outset.
Mariya Gonor: Mm hmm.
David Harmon: So this is almost a means. to bind people to a non-compete, which is not necessarily negotiable
Mariya Gonor: Right.
David Harmon: So, it’s viewed, potentially viewed as an adhesion contract if it’s midstream of [00:07:00] employment.
Mariya Gonor: Yep.
David Harmon: But there are companies that will impose that. They can do that. Because when you have an at-will employment relationship, you really can be, you know, it’s hire or fire as long as you don’t violate any law such as discrimination.
David Harmon: And in some states, continued employment is valid consideration. for the signing of the non-compete.
David Harmon: Right. Many employers, in order to enhance the enforceability of a non-compete, they will update their restrictive covenant documents, whether it’s non-compete, non-solicit, uh, or confidentiality, and they’ll do that on an annual basis. At bonus time, for example, whenever there’s an increase in compensation, which, uh, as Mariya has said, would be, uh, additional consideration.
Mariya Gonor: Exactly.
David Harmon: That would be the time to impose a non-compete, whether it’s a repetition of the prior agreement to have a re-signing or to add certain specifics to the particular language of the provision. But the question is, can that non-compete be the condition by which people are bound or, as a condition of continued employment. That’s the key thing.
Mariya Gonor: Right, and it depends on the state. If the state allows it, if a state does not allow continued employment to serve as a fancy legal word, consideration or payment, right? In exchange for the non-compete. then at the end of the day, that agreement may not be enforceable even if signed. Now, if you’re an employee who is presented with something like this on Monday and are told, hey, you got to sign this or by Friday, you’re gone. What do you do?
David Harmon: Well, you may, consider trying to negotiate it and maybe try to limit it to the type of termination that might occur.
Mariya Gonor: That’s fair.
David Harmon: Or the, when you might leave or the duration of it and the scope. But if it’s not negotiable, you may have to sign it to keep your job.
Mariya Gonor: And then fight it out later.
David Harmon: Based on the scope, duration, and geographic range of that non-compete, whether it’s enforceable to begin with.
Mariya Gonor: Or frankly, decide if this is an employer you want to work for. If somebody is presenting you with such an ultimatum in procedurally unconscionable, I think a decision needs to be made if this is, if this is an employer you want to be doing business with.
David Harmon: So, there are many companies that don’t have non competes, but they do have non-solicitation provisions. And those non solicitation provisions are typically twofold. They are restricting what I call the poaching of employees. That if you are to leave for whatever reason, there’s a restriction for a certain duration of time that you’re restricted from trying to solicit and take other employees who remain in the employ of the company. The second is, is clients. And, uh, suppliers and investors, those with whom the company has relationships.
Mariya Gonor: So, the first one limits one’s ability to really blow up your former boss’s ability to do business if you’re not partying on, uh, on good terms. And then the second one, like David said, applies to clients. What kind of clients? Actual clients? Prospective clients? What’s the limitation? How does one know?
David Harmon: Mariya, any employee being given such a document should read it.
Mariya Gonor: Yes.
David Harmon: That’s the important thing. Like my law school professor said, and read the whole thing. He used to say, read the statute, read the entire statute. So read the agreement from start to finish.
Mariya Gonor: Yes. Attentively.
David Harmon: And then try to understand it. And then ask questions.
Mariya Gonor: Yes.
David Harmon: And if you need to seek counsel, seek counsel to have it explained.
Mariya Gonor: Don’t be afraid to negotiate. From the employee perspective, a lot of the times employees believe that when a document is handed to them, it’s a take it or leave it. Sometimes it’s worth to ask that extra question of whether or not it actually is a take it or leave it, it may be negotiable.
David Harmon: Well, I always believe that everything’s negotiable. That’s a basic premise of being a lawyer.
Mariya Gonor: I was just going to say we would be unemployed very quickly if things were not negotiable, in fact.
David Harmon: Very true. Very true. But it’s a matter of understanding. And then there’s always the possibility that if that agreement If that restriction is non-negotiable and you have to sign it, there’s also the possibility that down the road that’s not going to be enforceable because it is beyond the reasonableness of in scope, in duration, and in geographic range.
Mariya Gonor: Yes. So, frequently when clients come to us asking for help in drafting the non-solicitation agreement. The question arises again, what kind of clients? Is it actual clients? Is it prospective clients? Is it the clients that this employee had connection with? And all of that is going to depend on your business.
David Harmon: Quite often, these provisions are written that the limitation is the company’s looking to restrict the solicitation or involvement. going forward of their current employees when they become former employees, that they, if they’ve had significant contact during a, a look back period, whether it’s six months, a year, 18 months, two years, whatever it might be, because that’s where relationships have been formed. And there’s using the company’s platform to engage with clients, perspective clients and then bringing those relationships to the next employer. And that’s really the big concern.
Mariya Gonor: Yeah. So, companies are well advised to take a look at how they’re operating, how they’re doing business, figure out what level employee this is. Is this an employee who’s going to have a substantial contact with the client? Now, is this an employee in a position that if that employee went to work for that client, the company would lose an entire line of business? Right, because that’s a very realistic possibility for some of our clients. And structure the non-solicitation agreement in a way that protects the relationship and the business of the employer.
David Harmon: Another thing with these restrictions is the enhancement of enforceability is provided by payment. If there’s some sort of consideration for that non-compete, non-solicit, whatever it may be. Post-employment, that that’s going to really enhance the ability to enforce and courts will look at it that way.
Mariya Gonor: Yeah, and actually when we help clients negotiate agreements, when we understand the business of the employer and the nature of the client’s position, now that’s an if the client is an employee, it helps us to better position our negotiating posture and to better negotiate something that is very specific and also that is not restrictive on an employee.
David Harmon: So, I had a recent experience representing an executive Leaving a public company, and the executive had a very, the, the agreements were very broad in terms of their non-compete, non-solicit restrictions, very, very broad. And the employee, who’s an executive, felt that on departure, he was in effect unable to work in the industry, and that’s all he had known for twenty-something years. So, many times companies will, They’re not going to offer a watering down of the restrictions. You have to ask, you know, if you don’t ask, you don’t get it. So, we did that. We raised that issue, and we look to water it down to specific competitors and ultimately the company did agree to that. And he was in a much better position to go forward, to find a job still in the industry, but not for five specific competitors.
Mariya Gonor: Yeah, that’s great. And it would, it worked because the industry was probably beyond those five competitors, right? Because if we’re talking about an industry that only has, let’s say two competitors, for instance, if you’re working for SpaceX and then they say, you can’t go work for Boeing and their aerospace division, it’s likely that the court is not going to enforce that non-compete because you know, that’s the only alternative. So, if you’re not permitted to go to work for that alternative, you can’t work in that industry altogether.
David Harmon: That’s true. It all depends upon the players. How many are in that space?
Mariya Gonor: But yeah.
David Harmon: Pardon the pun.
Mariya Gonor: I love that joke, my favorite, they’re my favorite. All right. One more restrictive covenant that we did not see speak about today yet is the NDA, nondisclosures, and protections of confidential information, which I think is another valuable tool for certain types of employers to not limit the geographic ability of the employee to compete. But, to prevent the employee from taking important, private, proprietary information from the employer.
David Harmon: Trade secrets.
Mariya Gonor: Trade secrets.
David Harmon: Protecting the secret sauce.
Mariya Gonor: Yes.
David Harmon: That would fall under the confidentiality umbrella.
Mariya Gonor: Although I’m sure somebody on TikTok will figure out the secret sauce in some way. They figured out the special McDonald’s sauce and they did it and it was pretty, pretty close.
David Harmon: That’s true. That’s true. However, there are exceptions. There are exceptions under the NLRA. And there are exceptions under the Defend Trade Secrets Act. So those are always carve-outs to confidentiality provisions that provide statutory rights to the employee in the context of a confidentiality agreement.
Mariya Gonor: Yeah. Just like we said before, with an industry, a confidentiality provision cannot be overly broad to an extent that you can’t use anything that you learned in connection with our industry while you worked here, because then you could just never be employed again.
David Harmon: It shouldn’t be lost to you know, view employers as using these restrictions, confidentiality that we’re just talking about now, to send a message rather than looking to enforce these restrictions in court or to take legal action. So that’s something that needs to be looked at and what I typically do is I check to see whether there’s been any litigation. Uh, where companies have broad actions to enforce their restrictive covenants.
Mariya Gonor: When you check for litigations, are you looking to see if employees sued the employer or the other way?
David Harmon: I look on both sides. I look on both sides. Because if there’s been, a challenge brought by the, it could also be the future The new employer that is sent a cease and desist letter then develops into litigation because the new employer knew about the restriction.
Mariya Gonor: Yes.
David Harmon: So, then you have a tortious interference with contract claim. So now it’s not only the individual parting employee, it’s also the new employer.
Mariya Gonor: You actually bring in a great point because what I’ve noticed is that Not a lot of employers actually ask this question when an employee starts the employment. And one of the standard documents that we typically recommend for employers in connection with the onboarding proceedings for new employees is a representation either in an offer, contract of employment, or as a separate standalone document, a representation that they are not bound by any non-compete or any non-solicit that would prevent them from joining the employer’s new employee. And another good idea in connection with that could be if the employee discloses that they are subject to a non-compete, take a copy, request a copy of it, and review it with your counsel.
David Harmon: It’s very important to bring that to the table because no new employer wants the baggage or problem going forward with a non-compete or a non-solicit or confidentiality or whatever the restriction may be that’s in place in the prior employer’s documents and then all of a sudden the employee arrives. The due diligence has not been conducted by the new employer and lo and behold, they find themselves in a bind and the employees now potentially out of work. So, I recently represented an individual, this was in financial services, who was moving into a new position. He was unaware of all of the restrictive covenant documents that he had signed, non-compete, non-solicit to be specific. But yet there was a representation in the new employer’s Contract with him that he had produced all of those restrictions, but it turns out that he hadn’t, so we had to vet that and then share that with the new employer. This is pre-employment though, this is while, while I’m negotiating the contract. And then, as it turns out, the in-house counsel of the new employer reached out to the prior employer to try to work out a modification in terms of timing and scope. And that’s how we resolved it. But it was very interesting, the whole thing was that he didn’t know he had that.
Mariya Gonor: Right.
David Harmon: And had he gone to work for the new employer signing that agreement that said that he had disclosed everything, he would have been in breach on day one and he would have opened up not only himself but the new employer to a claim for breach.
Mariya Gonor: To potential liability. Yeah. Yeah, absolutely. I think the story actually brings us quite nicely into our strategies, recommended strategies for employers and for employees So, David, what is a good employee strategy? Well, a good employee strategy, I think, is to make sure you know what your restrictions are.
David Harmon: Yes. Okay? And before you make a move Or, you know, it’s before you start, you have to know what’s in your, employment file, what’s in your agreement, or agreements. You need to know what’s there. Make sure that you understand those restrictions, seek counsel, and that to me is the most important to know what you have.
Mariya Gonor: That’s a great strategy. For employers, given the uncertain nature of future non-competes, employers should not hesitate to draft specific documents. For specific categories of their employees, take a look at what you currently have, analyze your business and figure out whether or not certain categories of employees should have a more aggressive non-solicitation covenant for clients, employees, confidentiality provision, be redrafted in a way that actually to what that employee does for you. Take a look at the other restrictive covenants to see if the protections that you seek from a non-compete actually apply. If non-compete is what you need, make sure it’s permitted in your state and make sure that it’s tailored narrowly enough to withstand any challenge. Consultation with counsel in this connection is extremely helpful.
David Harmon: Another aspect for the employee is to not only know what you have but it’s to disclose. It’s very important to deal with the restrictions that are in place before you are transitioning to a new company.
Mariya Gonor: With that, thank you for joining us today, and although what we’ve discussed should not be taken as or deemed as legal advice, we hope that you found our time together entertaining and educational.
David Harmon: If you’d like to continue the discussion, we’d welcome that. Please feel free to contact us at theemploymentstrategists@norris-law.com.