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The New York Times Continues to Explore Non-Compete Agreements
Over the past few months, The New York Times has published several stories and editorial pieces concerning non-compete agreements than I ever can recall. The latest, published July 14, takes readers far away from New York to Idaho, where Conor Dougherty explores the change in the law that makes it much more difficult for employees to contest the validity of restrictive covenants. the NYT piece explores the motivations for how the law changed to favor employers and the lobbying efforts behind the legislative efforts.
Idaho's statute is focused on "key employees," which actually includes independent contractors too. The applicable definition is fairly broad and applies automatically to the top 5 percent in terms of wage earnings. But it goes beyond that to include those who "have the ability to harm or threaten an employer's legitimate business interests."
The statute does more. It creates a series of rebuttable presumptions concerning reasonableness. For time, 18 months is presumed reasonable. For territory, it's where the key employee provided services. And for activity scope, reasonableness is presumed if the covenant is limited to the type of employment that the key employee conducted. The upshot of the Idaho law is this: the employee has the unenviable burden of proving a negative, that he or she is incapable of impairing the employer's legitimate business interests.
This sort of burden-shifting approach turns non-compete law on its head. The employer, seeking to restrain trade, always should justify and establish both the legitimate business interest (beyond mere protectionism) and the imminent harm it faces to that interest. The Idaho approach is reminiscent of the way courts have analyzed 14th Amendment challenges to economic legislation through rational-basis review. That standard, which fairly can be called judicial abdication and not judicial review, requires a challenging party to disprove every conceivable basis which might support the law. And in some jurisdictions, a legitimate basis might even be economic protectionism or a pure economic interest.
The dynamism of our economy requires much more engagement by the judiciary to assess, meaningfully, the asserted interest and justification for a non-compete clause. Requiring the employee to bear the burden of proving he or she won't harm the employer will lead courts to embrace covenants that are too protectionist and safeguard against only theoretical or irrationally perceived harm.
Idaho's statute is focused on "key employees," which actually includes independent contractors too. The applicable definition is fairly broad and applies automatically to the top 5 percent in terms of wage earnings. But it goes beyond that to include those who "have the ability to harm or threaten an employer's legitimate business interests."
The statute does more. It creates a series of rebuttable presumptions concerning reasonableness. For time, 18 months is presumed reasonable. For territory, it's where the key employee provided services. And for activity scope, reasonableness is presumed if the covenant is limited to the type of employment that the key employee conducted. The upshot of the Idaho law is this: the employee has the unenviable burden of proving a negative, that he or she is incapable of impairing the employer's legitimate business interests.
This sort of burden-shifting approach turns non-compete law on its head. The employer, seeking to restrain trade, always should justify and establish both the legitimate business interest (beyond mere protectionism) and the imminent harm it faces to that interest. The Idaho approach is reminiscent of the way courts have analyzed 14th Amendment challenges to economic legislation through rational-basis review. That standard, which fairly can be called judicial abdication and not judicial review, requires a challenging party to disprove every conceivable basis which might support the law. And in some jurisdictions, a legitimate basis might even be economic protectionism or a pure economic interest.
The dynamism of our economy requires much more engagement by the judiciary to assess, meaningfully, the asserted interest and justification for a non-compete clause. Requiring the employee to bear the burden of proving he or she won't harm the employer will lead courts to embrace covenants that are too protectionist and safeguard against only theoretical or irrationally perceived harm.
Contractual Injunction Clauses
Non-compete agreements contain a number of important terms beyond the restrictive covenants themselves. Clauses pertaining to fee-shifting, jury trial waivers, arbitration, and venue play a big role in determining how a case gets litigated and decided.
One standard clause that receives a lot of intention is the "stipulation" that a breach necessitates an injunction. Put another way, employers try to use these clauses to convince courts that they need not prove the essential elements of an injunction. They, instead, can point to the agreement itself as the basis for equitable relief.
Most courts are not receptive to this argument, finding that contractual clauses (particularly since they're not negotiated) must give way to court rules and procedures concerning injunctions. But not all courts say that. The Court of Appeals of Minnesota in St. Jude Medical, Inc. v. Carter, found an injunction remedies provision valid, relying on a general contract principle that court must enforce unambiguous terms. The problem with this reasoning is that it equates a non-compete with a freely bargained-for, non-adhesive agreement. In reality, a non-compete is not a conventional contract but a restraint of trade. Courts should always assess whether a moving party has met its burden to obtain an injunction, regardless of any contractual stipulations.
A copy of the opinion is available here.
One standard clause that receives a lot of intention is the "stipulation" that a breach necessitates an injunction. Put another way, employers try to use these clauses to convince courts that they need not prove the essential elements of an injunction. They, instead, can point to the agreement itself as the basis for equitable relief.
Most courts are not receptive to this argument, finding that contractual clauses (particularly since they're not negotiated) must give way to court rules and procedures concerning injunctions. But not all courts say that. The Court of Appeals of Minnesota in St. Jude Medical, Inc. v. Carter, found an injunction remedies provision valid, relying on a general contract principle that court must enforce unambiguous terms. The problem with this reasoning is that it equates a non-compete with a freely bargained-for, non-adhesive agreement. In reality, a non-compete is not a conventional contract but a restraint of trade. Courts should always assess whether a moving party has met its burden to obtain an injunction, regardless of any contractual stipulations.
A copy of the opinion is available here.
Wal-Mart Trade Secrets Verdict
In April, Wal-Mart was hit with a jury verdict in excess of $12 million for misappropriating technology pertaining to e-commerce software. The trade-secret owner, Cuker Interactive, thereafter moved for entry of a permanent injunction as is available under the Arkansas Trade Secret Act. The district court agreed that such an injunction was available to protect the development time Wal-Mart avoided by misappropriating Cuker's technology. The district court's opinion is an engaged discussion on the availability of injunctive relief even after entry of a damages award.
But Cuker's win was slightly tempered. The court also reduced the damages award by over $2 million based on a limitation-of-liability clause in the contract between Wal-Mart and Cuker.
quate. The rationale among jurisdictions which adopt this rule is fairly uniform: the loss of a customer relationship and associated goodwill is at least partially intangible and at some point damages become too speculative.