Category: Restrictive Covenants

Federal Trade Commission Issues Final Rule Banning Non-Compete Agreements, Prompting Immediate Litigation Blocking Enforcement. What Does It Mean For Your Business?

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning all future and most existing non-compete clauses, with few narrow exceptions for senior executives.  The rule, however, was immediately met with legal challenges, casting doubt on its future. The FTC has taken the position that entering into a non-compete agreement is an “unfair method of competition” within the meaning of the Federal Trade Commission Act, therefore rendering non-competes unlawful as a general matter. The FTC reasons that a non-compete ban was necessary to address conduct harming fair competition in the labor market, reducing wages, stifling innovation, and hindering business formation and entrepreneurship. Further, the FTC argues that the current state law approach, which assesses the enforceability of non-competes on a case-by-case basis, has not sufficiently addressed the competition concerns cited by the FTC. On the other hand, opponents of the FTC’s non-compete ban argue that the rule exceeds the commission’s statutory and constitutional authority and that non-competes are crucial in guarding an employer’s trade secrets, intellectual property, and significant investments in employee training and development. Key components of the final rule are: It is an “unfair method of competition” for any worker and an employer to enter into, or attempt to enter into, a non-compete clause, to enforce a non-compete clause,...

The NLRB’s Ongoing Shift Toward Employee-Friendly Standards

The labor law landscape is constantly in flux as changes in presidential administrations continue to play a significant role in the development of rulemaking and decisional law at the National Labor Relations Board (NLRB or the “Board”). Over the past several months, various NLRB decisions and guidance memorandums have tipped the scales further in the employee’s favor, requiring employers to re-think their current policies and agreements to avoid the pitfalls created by these recent decisions. Employee Handbook Policies The NLRB’s August 2nd opinion in Stericycle, Inc., 372 NLRB No. 113 (2023), found an employee policy unlawful because, from the employee’s perspective, it had a “reasonable tendency” to discourage employees from exercising their rights under the National Labor Relations Act (NLRA). This decision is a departure from the previous standard where the Board examined, “the nature and extent of the potential impact on NLRA rights, and [] legitimate justifications associated with the rule.” Now a policy is unenforceable if an employee could reasonably interpret it to restrict conduct protected under the NLRA, i.e., if the policy was enacted in response to such protected conduct, or if the policy, in practice, limits rights under the NLRA. In other words, the Board’s primary concern is whether an employee believes they cannot avail themselves of the concerted activities protected...

Governor Murphy Signs Bill Making Nondisclosure Provisions Unenforceable and Against Public Policy

On Monday, March 18, 2019, Governor Phil Murphy signed Senate Bill No. 121, which makes nondisclosure provisions in employment contracts or settlement agreements that are intended to conceal the details of claims of discrimination, retaliation, or harassment unenforceable and against public policy in New Jersey. Section 1 of the new law warns that a “provision in any employment contract that waives any substantive or procedural right or remedy relating to a claim of discrimination, retaliation, or harassment” is against public policy and unenforceable.” The law does not define “employment contract” and leaves open to interpretation whether it applies to all agreements between employer and employee, whether an employment agreement, a separation agreement, or a settlement agreement. The prohibition on waiving any procedural right would make arbitration agreements, which by their nature waive the right to a jury trial, also invalid and unenforceable in contravention of the Federal Arbitration Act and recent United States Supreme Court precedent. An immediate challenge to this aspect of the law is likely since it casts doubt on all arbitration agreements between an employer and employee that seek to include claims of discrimination, harassment, and retaliation. Section 1 also prohibits a prospective waiver of any right or remedy under the New Jersey Law Against Discrimination (NJLAD) or any other statute or...

Non-Competes – A Focus of New York Attorney General

Non-compete agreements clearly are the subject of scrutiny by the New York Attorney General’s office, which just issued guidance called “Non-Compete Agreements In New York State – Frequently Asked Questions” (“Guidance”). The Guidance, in the form of FAQs, generally describes New York common law regarding enforceability of non-competition provisions in employment contracts or standalone restrictive covenant agreements. It notes that a court has the ability to invalidate or modify an overly-broad non-compete. It also provides guidance to employees regarding whether to sign a non-compete, which it states is not a legal requirement but only a potential mandate of an employer. The Guidance includes a list of considerations for employees before they sign a non-compete. Further, it provides contact information within the New York Attorney General’s Office for individuals to obtain assistance to address unreasonable non-competes. Finally, the Guidance describes Attorney General-proposed legislation to prohibit non-competes for workers earning below $75,000 per year. The Attorney General issued the Guidance after a recent matter it handled in which it obtained prospective compliance by an employer regarding its use of non-competes. The matter is the subject of an Attorney General press release. It is imperative that employers who use restrictive covenants in employment agreements and standalone restrictive covenants review their forms and procedures to comply with applicable law....

“Mere Continued Employment” is Insufficient Consideration for Non-Compete Agreement in Pennsylvania

Last week, in Socko v. Mid-Atlantic Systems of CPA, Inc., the Supreme Court of Pennsylvania decided that restrictive covenants not to compete are unenforceable if made during a worker’s term of employment unless supported by “new and valuable consideration, beyond mere continued employment.” That is so, according to the Court, even if the agreement contains language that would otherwise obviate the requirement of consideration pursuant to the Uniform Written Obligations Act (“UWOA”). That statute provides that “[a] written release or promise . . . shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement, in any form of language, that the signer intends to be legally bound.”

Trade Secrets Theft by Former Employee Results in a Criminal Conviction Under the Federal Computer Fraud and Abuse Act but Still Leaves Uncertainty Over the Scope of the Act

In United States v. Nosal, a federal jury in California convicted a former employee of Korn/Ferry for violating the Computer Fraud and Abuse Act (“CFAA”). The evidence showed that the defendant directed his co-conspirators within the firm to use a borrowed password to gain access to trade secrets to be used in establishing their own business. The use of the borrowed password was critical to the successful prosecution under the CFAA because earlier in the case the Ninth Circuit Court of Appeals issued an opinion that narrowly interpreted the statute to prohibit only “unauthorized procurement or alteration of information, not its misuse or misappropriation.” The significant aspect of the Ninth Circuit’s interpretation of the CFAA in Nosal is the Court’s conclusion that a violation of the statute does not occur merely because an employee initially uses his authorized access to obtain his employer’s proprietary information even if he does so with the intent to misappropriate it. Presumably, had Nosal’s co-conspirators who accessed the computerized information in question been able to do so using their own passwords, there would have been no “unauthorized procurement” in violation of the CFAA.

Federal Computer Fraud and Abuse Act Claim Asserted in Complaint Tethers Lawsuit to Federal Court

A Federal District Court recently refused to dismiss a complaint for lack of subject matter jurisdiction because, among several state law claims, the plaintiff – the individual defendant’s former employer – also asserted a claim under the Federal Computer Fraud and Abuse Act (CFAA). In NouvEON Tech. Partners, Inc. v. McClure, No. 3:12-CV-633-FDW-DCK, 2013 U.S. Dist. LEXIS 29208 (March 5, 2013), a North Carolina Federal District Court denied defendants’ Rule 12(b)(1) motion to dismiss, for lack of subject matter jurisdiction, a myriad of state law claims filed by NouvEON against its former employee (McClure) and her new employer (Smarter Systems).

New Jersey District Court Enjoins Former Financial Services Employee from Taking Customer Information

In a case to be noted by financial services entities that are signatories to the “Protocol for Broker Recruiting,” a New Jersey District Court issued a preliminary injunction to a financial services employer, Ameriprise Financial Services, Inc. (“plaintiff”) to prevent a former financial advisor employee from retaining certain client information that he downloaded from his computer prior to his departure from plaintiff. Plaintiff was a party to the “Protocol for Broker Recruiting” that prescribes a method for a departing employee to retain certain client information when leaving for another financial services institution. To grant the injunction, the Court found that plaintiff showed it likely would succeed on its underlying breach of contract claim, it would suffer immediate irreparable harm absent the injunction, defendant would not suffer harm if enjoined, and the injunction favors the public’s interest. The Court essentially decided that if the Protocol is not followed in the first instance, a departing financial representative’s subsequent compliance is tainted and insufficient to withstand subsequent legal challenge.

New Jersey’s New Trade Secrets Act

New Jersey employers should be aware that yesterday Governor Chris Christie signed into law the New Jersey Trade Secrets Act (“the Act”), which for the first time codifies the law in New Jersey concerning the misappropriation of trade secrets. The new law is derived largely from, although is not identical to, the Uniform Trade Secrets Act, variations of which have been adopted in the great majority of states. New Jersey companies who are concerned about potential trade secret misappropriation by current or former employees should study the new law carefully.