Tag Archive for: non-competes

Colorado passes new law severely limiting restrictive employment agreements, including non-competes, non-solicits and even some non-disclosures

Colorado passed HB 22-1317, which severely limits restrictive employment agreements, including non-competes, non-solicits and even some non-disclosures. HB 22-1317 is currently before the Governor where it is expected to become law without veto.

HB 22-1317 applies only to agreements containing such provisions if entered into on or after 8/10/2022; however, the Act contemplates the possibility that a referendum petition will be filed by voters to contest it, in which case HB 22-1317 provides it will be held in abeyance without any part taking effect until after the November 2022 state election. Absent a successful challenge by referendum in this fall’s vote, HB 22-1317 will entirely restructure Colorado’s longstanding law in this area, CRS 8-2-113.

First, like existing Colorado law, HB 22-1317 renders void all non-competes unless they fall into certain defined exceptions. However, unlike existing Colorado law, HB 22-1317 significantly limits the available exceptions to only the following three categories:

  1. Covenants associated with the sale of a business, which can include sales arranged as so-called asset deals.
  2. Covenants that (a) are no broader than what is reasonably necessary to protect trade secrets (b) so long as the individual earns enough to qualify as a “highly compensated worker,” a legally defined phrase with a minimum earning level set by the CDLE, currently at $101,250 per year. Note: HB 22-1317 does not permit such covenants for the protection of mere confidential information; the information must instead rise to the level of a “trade secret” as otherwise defined in and protected by Colorado law.
  3. Mere non-solicits for customers (not non-competes) if the worker earns at least 60% of the “highly compensated worker” amount (currently $101,250×60%=$60,750 per year).

Note: Under HB 22-1317 there is no longer an exception permitting non-competes for “executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.”

Second, each of those three exceptions are available only after a new written notice is provided. HB 22-1317 will require that written notice be provided (a) to prospective workers before the worker accepts the offer of employment and (b) to current workers at least 14 days before the covenant will be effective or additional compensation is provided or a change in the employee’s terms or conditions of employment occurs as consideration for the covenants, whichever is earlier. The written notice must be provided in a document separate from whatever document contains the covenants. It must be written in “clear and conspicuous terms in the language in which the worker and employer communicate about the worker’s performance.” It must be signed by the worker. Copies must be made available upon request by the worker once per year. The notice must either provide a copy of the agreement containing the covenant or identify that agreement “by name and state() that the agreement contains a covenant not to compete that could restrict the workers’ options for subsequent employment following their separation from the employer.” The notice must “direct() the worker to the specific sections or paragraphs of the agreement that contain the covenant not to compete.”

HB 22-1317 makes additional revisions to an employer’s ability to impose covenant-like restrictions in the event the employer provides employer-paid training (which does not generally include “normal, on-the-job” training) and in situations involving physicians.

Next, HB 22-1317 prohibits non-disclosure agreements (confidentiality agreements) to the extent they seek to protect “general training, knowledge, skill or experience whether gained on the job or otherwise.” Nor can such an agreement apply to “information that is readily ascertainable to the public, or information that a worker otherwise has a right to disclose as legally protected conduct.”

It is not clear from HB 22-1317 if its written notice requirements apply to non-disclosure agreements (confidentiality agreements). It appears on its face as drafted that HB 22-1317 only requires such written notice for covenants not to compete, which may include non-solicits (to the extent within the above three exceptions) and not for a non-disclosure agreement (confidentiality agreement) that contains no non-compete and no non-solicit.

HB 22-1317 also prohibits contrary choice of law and choice of forum provisions; if a worker resides primarily in or works in Colorado, at the time of termination, Colorado law will apply, and the worker may not be required to litigate outside of Colorado.

HB 22-1317 imposes new penalties and permits the Colorado Attorney General to take action directly against a violating employer. Both employees and the Colorado Attorney General can bring a declaratory action to invalidate violative covenants.

Employers should review all agreements containing covenants in Colorado. This includes not only formal non-compete/non-solicit agreements, but also confidentiality (non-disclosure, aka proprietary information agreements). This includes all agreements such clauses, for example, any equity incentive agreements, restrictive stock grants, stock option awards, etc. Employers are reminded to review not only for going-forward compliance in terms of such covenants but also their choice of law and choice of forum provisions.

Supreme Court rules CFAA is not available in most employment lawsuits involving trade secrets, NDA’s, non-competes and non-solicits

Resolving a long-running split among the lower courts, the Supreme Court has, unfortunately for employers, held that the CFAA (Computer Fraud and Abuse Act) is not available in most lawsuits against current and former employees involving trade secrets, NDA’s, non-competes and non-solicits. The CFAA is a powerful federal law that allows enhanced remedies for companies who are the victim of someone using their computers “without authorization.” It has, in many jurisdictions, been the frequent basis for lawsuits against current and former employees who use computers and the data on computers, such as customer lists, pricing information and other trade secrets or confidential information, to compete against their employers.

Many jurisdictions had held that, as soon as an employee undertakes a disloyal act — such as violating an NDA, non-compete, or common law breach of loyalty — any subsequent use, including access, of their employer’s computers, including data on those computers, is “without authorization.”

The Supreme Court rejected that position and held, instead, that the CFAA only “covers those who obtain information from particular areas in the computer — such as files, folders, or databases — to which their computer access does not extend. It does not cover those who … have improper motives for obtaining information that is otherwise available to them.”

Why would the Supreme Court strip employers of such a valuable tool for protecting their confidential information? Remember the CFAA was only used in such situations when — and because — the employee violated the company’s rights. The majority was concerned that the CFAA also includes criminal penalties. Indeed the case arose as a criminal prosecution. The majority reasoned that permitting the CFAA to cover those whose use was unlawful due to an “improper motive” would result in a “breathtaking” number of criminal cases. A 3-justice dissent disagreed, but until and unless Congress amends the CFAA, the Supreme Court’s decision has stripped employers of a previously valuable tool.

Employers (and employees) involved in or anticipating lawsuits that include CFAA claims should immediately review the Supreme Court’s decision and its impact on their litigation.

Source: Van Buren v. U.S., case no. 19-783 (6/3/2021).

Colorado trial courts are not required to blue-pencil non-compete and non-solicit covenants

Even where an agreement says that covenants “shall be” blue-penciled (meaning, rewritten if determined to be unenforceable and narrowed to whatever the court rules would have been enforceable), a trial court in Colorado is not required to do so. In a recent decision, 23 LTD v. Herman, case no. 16CA1095 (Colo.App. 7/25/19), the Colorado Court of Appeals confirmed blue penciling is within a trial court judge’s discretion. The parties cannot, by way of mandatory language like “shall,” not only confer on the judge the authority to re-write their agreement but an obligation to do so.

Simply put, the court is not a party to the agreement, and the parties have no power or authority to enlist the court as their agent. Thus, parties to an employment or noncompete agreement cannot contractually obligate a court to blue pencil noncompete provisions that it determines are unreasonable.

The case is a strong reminder for employers not to over-reach when drafting covenants, non-competes or non-solicits. While a blue penciling clause may give the judge to make some changes like reducing the geographic or temporal reach of the covenant (how many miles/how many months), the parties should not expect a judge will be willing to make changes beyond that, or even of that nature. Whether to blue pencil at all is an issue for each judge.

Fundamentally, it is the obligation of a party who has, and wishes to protect, trade secrets to craft contractual provisions that do so without violating the important public policies of this state.[5] That responsibility does not fall on the shoulders of judges

California courts strike non-solicits

Two recent California decisions warrant immediate review by companies that might seek to enforce non-solicitation covenants. The two courts each struck covenants that prohibited former employees from soliciting the company’s employees. The first decision was announced by the California Court of Appeals, which summarized its analysis of the non-solicit at-issue, as follows:

Turning to the instant case, we independently conclude that the nonsolicitation of employee provision in the CNDA is void under section 16600. Indeed, the broadly worded provision prevents individual defendants, for a period of at least one year after termination of employment with AMN, from either “directly or indirectly” soliciting or recruiting, or causing others to solicit or induce, any employee of AMN. This provision clearly restrained individual defendants from practicing with Aya their chosen profession — recruiting travel nurses on 13-week assignments with AMN. (See Dowell, supra, 179 Cal.App.4th at p. 575 [finding a broadly worded nonsolicitation clause preventing employees from rendering any service to “any of the accounts, customers or clients with whom they had contact during their last 12 months of employment” void under section 16600]; D’Sa, supra, 85 Cal.App.4th at p. 930 [finding a provision in an employee confidentiality agreement was void under section 16600 because it prevented an employee from rendering “`services, directly or indirectly, for a period of one year after separation of employment with [employer] to any person or entity in connection with any [c]ompeting [p]roduct'”]; Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859 (Metro Traffic) [finding a broadly worded noncompetition provision void under section 16600 because it prevented an employee from working for a competitor for a period of one year after termination from the employer].)

As that quote suggests, the Court of Appeals noted that the non-solicit acted, for these individuals, who were recruiters, like a non-compete. If they could not solicit the company’s employees, the Court of Appeals reasoned, they could not compete, since recruiting was their business.

Would this analysis apply even where the individual was not a recruiter? It isn’t clear, but the second recent court decision suggests it might.

Employers should have their proprietary information agreements (and any other agreement containing covenants) reviewed by legal counsel, especially if California law may be implicated.

Source: AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., case no. No. D071924 (Cal.App. 11/1/18); Barker v. Insight Global, LLC, case no. 16-cv-07186-BLF (N.D.Cal. 1/11/19).

Massachusetts non-compete law

Massachusetts has adopted what may be the country’s singlemost employee-side non-compete law. That law, among other things, mandates at least 1/2-year’s garden leave, in other words, at least 1/2 of an employee’s average salary (with the formula to calculate specified in the statute). Timing requirements are imposed regarding the process by which covenants can be entered into with an employee. Additional constraints exist on the duration and geographic scope of permitted non-competes. The law applies to non-competes entered into on or after 10/1/18. It does not apply to a number of other types of covenants, including non-solicits of employees, non-solicits of customers, non-competes entered into for the sale of a business and non-competes entered into outside of employment. Employers with non-competes in Massachusetts are advised to immediately begin analyzing their agreements.

Source: Massachusetts’ 2018 act entitled, “An act relative to the judicial enforcement of noncompetition agreements”

Dissenter rights include ability to terminate non-compete?

The Colorado Court of Appeals held that a shareholder’s statutory dissent rights, in at least the facts of the case before it, included the ability to terminate an existing non-compete. In this case, the plaintiff was a doctor at and a shareholder of a clinic. When his clinic merged with another, he disagreed and exercised his statutory right under C.R.S. 7-113-202 to dissent and demand payment for the fair market value of his shares. In addition, he contested the continuing viability of his then-existing non-compete.

In this case, the Colorado Court of Appeals held that he was entitled to be paid the fair market value of his shares but added that he was also relieved of his non-compete. To hold otherwise, the Court of Appeals said, would “further penalize Crocker’s exercise of his right to dissent, rather than protect him from the conduct of the majority” who had voted for the merger.

The decision drew a dissent as to the ruling relieving him of the non-compete. It remains to be seen whether the case will be heard by the Colorado Supreme Court.

In analyzing the case, the Court of Appeals noted a variety of facts, including the geographic radius of the non-compete versus the location of the plaintiff’s residence. It also remains to be seen whether this decision will be limited to its facts.

Source: Crocker v. Greater Colorado Anesthesia, P.C., case no. 2018COA33 (Colo.App. 3/8/18).

NLRB General Counsel issues memo outlining likely reversals to Obama-era precedents

As previously reported here in this blog, the Trump Board (NLRB Boards are often colloquially but not pejoratively referred to by the President during their term) has begun overruling Obama-era precedents. Further reversals are anticipated. Curious which Obama-era NLRB precedents are likely to be reversed?

NLRB General Counsel Robb issued a controversial memo, shortlisting the cases he thinks most warrant attention. Indeed to call it a shortlist is a stretch. The General Counsel lists 26 categories, that range from employee access to email, to protections for section 7 rights, obscene and harassing behavior, off-duty access to property, the Weingarten right to have a representative present, rights of employees during contract negotiations, successorship and of course the joint employer doctrine, unilateral changes consistent with past practice, information requests during the processing of a grievance, dues check-offs, remedies, deferral, and, well, the list goes on, as will employers’ need to stay tuned to forthcoming developments at the Board.

Source: NLRB General Counsel Memorandum GC 18-02.

Tenth Circuit reaffirms need for irreparable harm to obtain injunction in trade secrets case

Both federal and state law (respectively, the Defend Trade Secrets Act (DTSA) and Colorado’s Uniform Trade Secrets Act (CUTSA)) authorize a company to obtain a preliminary injunction against a former employee who is using or threatening to use its trade secrets. The Tenth Circuit recently reaffirmed that, among the requirements for such an injunction, is proof of irreparable harm. (The other requirements are (1) substantial likelihood of success once the merits of the case are decided, (2) the threatened injury outweighs the harm of the injunction, and (3) the injunction will not be adverse to the public interest.)

To be “irreparable” the harm that will be suffered but for the preliminary injunction must be the kind that cannot be reversed, repaired or even compensated for in damages.

In this case, the trial court found that the harm the former employer would suffer if no injunction was issued could be compensated for in damages. In other words, quoting the trial court, it could be “reasonably quantified” in terms of dollars, and such an award of damages “would have adequately made (the company) whole.” Typically that is enough to show such harm is not “irreparable” and therefore a preliminary injunction should be denied.

However, the trial court decided that no showing of actual harm was necessary to prove the irreparable harm element; it decided that the element of irreparable harm could instead be presumed. The court so decided “because both the DTSA … and the CUTSA … provide for injunctive relief.”

The Tenth Circuit reversed. The Tenth Circuit held that legislatures can create presumptions of irreparable harm but to do so they need to say so. Both DTSA and CUTSA lack such language. They merely allow for injunctive relief:

DTSA and CUTSA … merely authorize and do not mandate injunctive relief and thus do not allow a presumption of irreparable harm.

Without a presumption of irreparable harm and lacking proof of irreparable harm, the Tenth Circuit reversed.

The case illustrates the need to prove irreparable harm, in order to obtain a preliminary injunction in cases involving trade secrets. The case is also a reminder that irreparable harm cannot exist where monetary damages will make the plaintiff whole.

Source: FIRST WESTERN CAPITAL MANAGEMENT COMPANY v. MALAMED, Court of Appeals, 10th Circuit 2017 – Google Scholar

Individual employee non-competes struck for failure to bargain with the workers’ union

Unionized employers may not implement unilateral changes to wages, hours and working conditions without first providing the union notice and an opportunity to bargain. A union is not required to bargain.

In a previous post this blog summarized a Sixth Circuit case, Detroit Edison, that held an employer, who gave notice, was not required to negotiate with a union that merely griped about changes without actually requesting negotiations.

In this case, the company failed to give notice. Instead the company simply started requiring union-represented employees to sign a confidentiality agreement that contained non-competes, invention assignment language, non-interference language, and non-solicits as to both employees and customers. While this type of agreement is not, itself, unusual in the American workplace, unionized employers need to remember that unions are the exclusive bargaining agent of represented workers, so the company must give notice of changes to wages, hours and working conditions, and if negotiations are requested, negotiate over the changes with the union.

Worse, this agreement contained an at-will disclaimer. Again, an at-will disclaimer is common in the American workplace, but here it contradicted the “just cause” discharge clause that the union had bargained for in its collective bargaining agreement with the company.

The D.C. Circuit had no difficulty upholding the NLRB’s decision against the company.

Furthermore, the Court affirmed the Board’s holding that the non-solicits were themselves violative of NLRA rights (under section 7 of the NLRA). (Section 7 rights apply even to employees who are not represented by a union.) Under section 7, employees have the right to engage in protected concerted activity to further their wages, hours and working conditions. Doing so through a union is just one way they may exercise this right. Another is to solicit support from a company’s customers by way of a customer boycott. Here the customer non-solicit prohibited employees from “directly or indirectly” soliciting customers “to terminate or otherwise alter his, her or its relationship with the Company.” This aspect of the Court’s ruling appears highly controversial. It remains to be seen if other courts will interpret section 7 so broadly as to bar a customer non-solicit like this.

The case was Minteq International, Inc. v. NLRB, case no. 16-1276 (D.C. Cir. 4/28/17).

$1.3-million verdict overturned, where design was held to be publicly known, despite efforts to keep it confidential as a trade secret

Although publicly known information can be combined in proprietary ways that create a trade secret, the Colorado Court of Appeals held that a design that is not “a secret in the first place,” in other words, that is a matter “of public knowledge or of general knowledge in an industry” is not, itself, a trade secret, no matter how hard its owner works to keep it confidential, the design does not become a trade secret.

Lacking protection as a trade secret, the Court of Appeals reversed a jury’s $1.3-million verdict in this case for misappropriate in violation of Colorado’s trade secret laws.

The decision is a sharp reminder of the limitations imposed by Colorado law on companies seeking to claim trade secrets. The determination whether information constitutes a trade secret is often crucial in non-compete and non-solicit cases.

The case was Hawg Tools, LLC v. Newsco international Energy Services, Inc. — P.3d — (Colo.App. 2016).