Updated 2020 National Survey, Interactive Guide To Restrictive Covenants

National Survey on Restrictive Covenants This survey has been provided by the Fox Rothschild Labor and Employment and Securities Industry practice groups as a quick reference for in-house counsel and human resource professionals. The law in this area not only varies considerably from state to state and changes frequently, but its application is fact-specific. This outline therefore is not a substitute for, and should not be relied upon as, legal advice concerning any particular restriction or factual situation. For more information contact: Ernest E. Badway Joshua Horn Catherine T. Barbieri Jeffrey D. Polsky Daniel M. Rosales Jr. 212.878.7986 215.299.2184 215.299.2839 415.364.5563 212.878.7980 ebadway@foxrothschild.com jhorn@foxrothschild.com cbarbieri@foxrothschild.com jpolsky@foxrothschild.com drosales@foxrothschild.com About Fox Rothschild Fox Rothschild LLP is a national law firm with 950 attorneys practicing in 27 offices coast to coast including in California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Illinois, Minnesota, Nevada, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Texas, Virginia and Washington. Our lawyers provide a full range of legal services to public and private business entities, charitable, medical and educational institutions and individuals throughout the country. The firm as a whole ranks among the top 100 law firms nationally, according to The American Lawyer. Our attorneys and staff are supported by sophisticated technologies that link our offices and promote rapid communication and collaboration among our departments and practice groups. Clients have access to the full resources of our attorney network, and to the depth of experience available firmwide. Every matter receives the individualized attention, innovative strategies and cost-effective approaches that are the hallmarks of our firm. Our practice is an aspect of Fox Rothschild that is not found in many other law firms. We provide not only high-quality and cost-effective legal services, but also a perspective on local government, local politics, the local judiciary and local practices that can be attained only by a law firm intimately involved with the needs and concerns of the communities where its lawyers practice. Fox Rothschild’s goal of becoming the preeminent law firm in the nation has driven our expansion into strategic locations throughout the country. In tandem with our overall expansion, our individual offices have added seasoned attorneys with strong credentials and key regional associations. These attorneys bring a depth and breadth of experience clients can rely upon to service every aspect of their legal needs. As a result, our clients have access to one of the largest and deepest legal practices in the nation. 2 STATE NON-COMPETE NON-SOLICITATION NON-HIRE/ “RAIDING” CONFIDENTIAL INFORMATION Alabama “Every contract by which anyone is restrained from exercising a lawful profession, trade or business of any kind otherwise than is provided by this section is to that extent void.” Ala. Code § 8-1-190 The Restrictive Covenants Act is codified at Ala. Code § 8-1-190, et seq. (Alabama Laws Act 2015-465, signed by Governor Bentley on June 11, 2015, and referred to as the “Restrictive Covenants Act”.) – went into effect 1/1/16 Enforceable covenant relates to a protectable interest of the employer; the restriction is reasonably related to that interest; the restriction is reasonable in time and place, and the restriction imposes no undue hardship on the employee.1 Protectable interests include trade information, customer relationships that employee has access to and confidential information.2 Courts may revise or “Blue Pencil” overbroad covenant to create enforceable covenant.3 Parties may also “preauthorize” courts to revise covenants to “save” them.4 Governed by Ala Code § 8-1-190, et seq. “[N]ot every contract which imposes a restraint on trade or competition is void.’ The fact that a contract ‘may affect a few or several individuals engaged in a like business does not render it void [under §§ 8-1-1, Ala. Code 1975].’ Every contract ‘to some extent injures other parties; that is, it necessarily prevents others from making the sale or sales consummated by such contract.’ (citations omitted)5 Governed by Ala Code § 8-1-190, et seq. Agreements in which competitors or contracting entities agree not to hire each other’s employees are enforceable subject to Ala. Code § 8-1-1 (2009).6 Also: “[T]he tort of intentional interference with contractual relations in the context of inducing an employee to leave a competitor requires an enforceable contract of employment, an absence of justification for interference in such contract, and evidence of injury.”7 In the absence of unlawful conduct, hiring a competitor’s former employees does not constitute unfair competition.8 State has adopted the Uniform Trade Secrets Act, Ala. Code § 8-27-1, et seq. Alaska Factors to weigh in evaluating enforceability: absence of limitations as to time and space; whether the employee is the sole contact with the customer; whether the employee has confidential information or trade secrets; whether the covenant seeks to eliminate more than ordinary competition; whether the covenant seeks to stifle skill and experience of employee; whether the benefit to the employer is disproportional to the harm to the employee; whether the covenant acts as a bar to the employee’s sole means of support; whether the employee’s talent was developed during employment and whether the forbidden employment is incidental to main employment.9 Overbroad covenants may be altered, and if they are made in bad faith, they will be struck.10 Permits “Reasonable Alteration” of Covenant to make it enforceable.11 A covenant not to contact former customers will be unreasonable if the employee did not have access to confidential information.12 No applicable law. Trade secrets are defined as “information that derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who may obtain economic value from its disclosure or use” and is subject to reasonable efforts to maintain its secrecy. Alaska Stat. §§ 45.50.910, 940, et seq. Status of customer lists and account information as trade secrets has not been addressed by the courts. 3 STATE NON-COMPETE NON-SOLICITATION NON-HIRE/ “RAIDING” CONFIDENTIAL INFORMATION Arizona Covenant must not be any broader than necessary to protect the employer’s legitimate business interest.13 The courts will consider the reasonableness as to the employee and his right to earn a living; reasonableness in geographic scope and term.14 Employers have a legitimate interest in protecting customer relationships and guarding against the misappropriation of confidential information and trade secrets.15 Permits Blue Penciling of covenant.16 It is less restrictive on the employee than non-compete; non-solicits are ordinarily not deemed unreasonable or oppressive.17 “A competitor is privileged to hire away an employee whose employment is terminable at will.”18 Anti-piracy agreements will be enforceable if plaintiff can prove a protectable business interest in restricting defendant from soliciting plaintiff’s employees.19 A manager who encourages or induces her employees to terminate their employment and join a competing company breaches her fiduciary duty.20 State has adopted the Uniform Trade Secrets Act. Ariz. Rev. Stat. Ann. § 44-401, et seq. Trade secrets are defined as “information, including a formula, pattern, compilation, program, device, method, technique or process that both derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use” and is subject to reasonable efforts to maintain its secrecy. Ariz. Rev. Stat. Ann. § 44-401, et seq. Arkansas Only enforceable if they protect specific legitimate business interest such as special training, trade secrets, confidential business information and customer lists.21 Covenants not to compete must also be reasonable in geographical restriction and duration.22 No Blue Penciling.23 Non-solicit covenants are subject to the same requirements as covenants not to compete.24 No applicable law, however: In the absence of a contract, plaintiff must prove intentional interference with its expectation of a continued long-term relationship with its at-will employees and that the defendant did not have a privilege to compete.25 Where the defendant former employee solicited coworkers while still employed by plaintiff, defendant will have breached his duty of loyalty to plaintiff.26 State has adopted the Uniform Trade Secrets Act, Ark. Code Ann. §§ 4-75-601, et seq. Customer lists are protectable as trade secrets if the identities of the customers are not easily ascertainable and the employer keeps the list confidential.27 4 STATE NON-COMPETE NON-SOLICITATION NON-HIRE/ “RAIDING” CONFIDENTIAL INFORMATION California Covenants not to compete are generally void, subject only to statutory exceptions for sale of a business. Cal. Bus. Prof. Code §§ 16600, 16601, 16602, 16602.5, et seq. California has also prohibited an employer from naming a non-California jurisdiction as the applicable law to avoid California’s prohibition on non-competes. Further, the effect of this measure effectively bans forum selection clauses. Cal. Labor Code § 925 (applies to contracts entered into or modified on or after Jan. 1, 2017). California Supreme Court has rejected a "narrow restraint" exception to the prohibition on covenants not to compete. A provision in an employment agreement restricting an employee from serving customers of or competing with a former employer is invalid. Cal. Bus. Prof. Code § 16600.28 No Blue Penciling29 if the underlying...