Articles Posted in Non-Compete Agreement / Covenant Not to Compete

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A free market requires a free labor market, and yet many of the politicians who claim a free market as a central component of our democracy actively work against the formation and maintenance of a free labor market.

A free labor market means workers are free to work for the companies they want to work for, doing the kind of work they want to do, but many companies have been using things like non-compete agreements and anti-poaching restrictions to keep workers from leaving to work for competitors.

The problem with such restrictions is that a labor market in which employees have more options is a more competitive labor market. When employees have the option to leave to work for another company that’s offering them more money, they have the opportunity to either leave their current employer in favor of higher wages or to stay and negotiate higher wages with their current employer. More freedom means more bargaining power, but companies have been actively working to restrict that freedom – and by extension, that bargaining power.

Anti-poaching restrictions have become the latest method companies have used to try to keep employees right where they want them. Fast food restaurants, in particular, have been using anti-poaching clauses in their contracts with franchisees in order to make sure franchisees don’t poach employees from each other. Such clauses usually forbid franchisees from hiring applicants who are current or recent employees of the parent company or any of its other franchisees without the express permission of the current or previous employer. Continue reading ›

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The Non-Compete

All contracts are subject to scrutiny before the law, especially when a dispute arises, including employment ones.  The importance of fair and just contracts always comes up in the media spotlight and the courts.  If a contract is too much in favor of one party who has far more bargaining power over the other party, it may violate the law. Employers should take this into consideration when drafting terms and have them reviewed by attorneys who are familiar with restrictive covenants within the scope of employment law.

One Clause Cannot Fit All Employees

A “one size fits all policy” when drafting restrictive covenants, will risk the clause being unenforceable. This is especially true if the demand is unreasonable or not necessary to protect legitimate business interests. When entering into the employment domain, covenants are imposed on employees restricting what they can and cannot do once they leave the job. Violations and restrictions are what employers often look for when they wish to seek enforceability of a contract that was entered into when employees decide to move elsewhere. Typically, such agreements prohibit the competing with an ex-employee for a certain period after the employee has left the business, or prevents the ex-employee from soliciting or dealing with customers of the business by using knowledge of those customers gained.  This issue was a reminder in the case of Dumrauf, where the Courts later deemed teh non-compete agreement to be unenforceable because it was too restrictive.

The Illinois Attorney General, Lisa Madigan, required WeWork Inc. to end its use of an overly broad clause for almost all of its employers. Overall, over 1,800 employees agreements were altered to become a less restrictive version and 1,400 agreements were rendered too restrictive voided.  The agreement went so far as to prohibit all employees from taking jobs with competitors, including cleaners, assistants, baristas and others who earn close to minimum wage.  It was viewed as being a career obstacle which did not allow people to make better decisions with their lives. The clause appeared to be one set for all employees and barred them for working with competitors after they left.  It also prohibited a worker from working anywhere where WeWork did.  That is a cost that WeWork had to bear as a social stigma in society, legally and will have a negative image in the minds of future employees as well.  Building back trust and rapport will be difficult. Continue reading ›

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While it’s always a good idea to put agreements in writing, taking that step isn’t always enough to guarantee that everyone involved will continue to abide by the terms of the contract, even if they all sign their names to it. When one or more parties violates the agreed-upon terms, you can sue them for breach of contract and get the court to issue an injunction requiring them to abide by the terms of the contract, but sometimes even that isn’t enough. Below are just a few examples of what can happen when people insisted on having it their own way.

A Salesman’s Gotta Sell

John Osborne worked as a salesman selling business forms for Uarco, Inc. The employment agreement he signed with the company included a non-compete clause that said Osborne would not sell business forms for any of Uarco’s competitors. After Osborne’s employment with Uarco ended, he went to work selling similar business forms for one of Uarco’s competitors. Uarco sued him for breach of contract and succeeded in obtaining an injunction from the court that, in part, forbade Osborne from reaching out to certain customers of Uarco for a period of two years. But the injunction had a loophole that let Osborne sell to a customer of Uarco if the customer expressed a desire to purchase business forms in an open bid situation (meaning different vendors submit a request for proposal and the customer goes with the lowest price).

Uarco then accused Osborne of being in contempt of court by violating the injunction when he contacted Uarco customers. When the court looked into the accusations, it found that Osborne had violated the terms of the injunction more than 100 times. Osborne admitted to contempt on two counts but claimed the rest of the customers did not fall within the limitations of the court’s injunction against him. The court disagreed and imposed further injunctions of an additional 190 days against him, as well as monetary sanctions.

Osborne appealed that decision and the case went before the Supreme Court of Kansas, which upheld the lower court’s ruling of the extended injunction and also awarded Uarco almost $10,000 to cover their legal costs in filing the lawsuit and arguing their case and an additional $10,000 fine. Continue reading ›

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When entering into the employment domain, covenants are imposed on employees restricting what they can and cannot do once they leave the job. Violations and restrictions are what employers often look for when they wish to seek enforceability of a contract that was entered into when employees decide to move elsewhere. Typically, such agreements prohibit competing with an former employer for a certain period after the employee has left the business, or prevents the ex-employee from soliciting or dealing with customers of the business by using knowledge of those customers gained.

Non compete clauses are in often in place for businesses to protect their investments in business and to not have employees turn around and share information that may be valuable in another employment setting.  That is why the wording of non compete agreements is important.  However, more and more businesses are now laying off employees.

It could be speculated that since more and more businesses are now laying off employees, that this is one of the reasons as to why Massachusetts legislature passed a bill that would require companies in the state to give employees some kind of compensation for up to a year after leaving if they decide to enforce a non-compete agreement.  Another reason is that workers could also end up for months without a paycheck from either a previous employer and by not being able to work for a competitor.  At least now, there is some form of relief and compensation until enforceability of the non-compete agreement is made.

When it comes to Massachusetts, the clause known as a “garden leave clause” provides pay for of at least 50% of the employee’s highest base salary over the prior two years, or other mutually-agreed upon consideration. Though the law does give some room for “other mutually-agreed upon consideration” leaving some level of flexibility.

As it stands, Massachusetts has become one of the first states to offer this kind of relief for employees.  This change may encourage others states to enact reforms. Another change of note is allowing employees to review the agreements prior to signature and relieving laid off employees from the non-compete’s restrictions.

An agreement can be deemed null and void or certain provisions within can be.  This is pretty much the same as it was before.  It’s impact and affect is yet to be tested.

https://www.bostonglobe.com/business/2018/01/15/compromise-may-near-restricting-noncompetes-mass/GWjyz1NOpnZbGA3YXCbWxL/story.html

http://www.mondaq.com/unitedstates/x/725264/Contract+of+Employment/Massachusetts+Legislature+Passes+LongAwaited+NonCompete+Law

ure+Passes+LongAwaited+NonCompete+Law

Continue reading ›

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Janitors can be seen as caretakers of a building; custodians. Their role can be either undermined or seen as part of what makes the world go around. They have also hit headlines recently when it comes to the push to have their pay raised. Their recognition has made its way into the realm of Contract Law and that trend is continuing. Janitor tests ended up setting the standard in non-compete cases and situations.

The Janitor Test and Non-Compete Agreements 

A non-compete agreement is a contract between an employee and an employer in which the employee agrees not to enter into competition with the employer during or after employment. These legal contracts prevent employees from entering into markets or professions considered to be in direct competition with the employer. Restricting covenants have had their application in the utilization of a concept that some courts and litigants refer to as the “janitor analogy” or the “janitor test,” when questioning the breadth and scope of a non-compete provision. The test has evolved over the years, which shows us that janitors and the test will stay.

The first case we can look at is Reading & Language Learning Center v. Sturgill (2016). That case arguably had an overbroad, unenforceable agreement because the agreement did not clearly define the capacity in which scope of services could be provided. The speech therapist could even be prohibited from services other than the function in which that person worked previously, including but not limited to, selling furniture, providing cleaning services or plan school functions.

This line of reasoning was also applied in Distributor Service, Inc. v. Stevenson (2014). The Court stated, “[t]he bottom line is that the plain language of the Non-Compete Provision would prohibit Mr. Stevenson from being an ‘employee’ of any entity who engages in ‘Competitive Business Activity,’ whether he is in sales, works as a janitor, or maintains the second employer’s lawn. Thus, it is overbroad and unenforceable.”

When scope was limited, a “janitor analogy” did not go far because the scope of services was limited to areas in which that person had worked previously. The confidential information could, therefore, be used.

The more recent case of Medix Staffing Solutions, Inc. v. Dumbrauf (2018) had “janitor clauses”. It just goes to show that their use is another example of why these sorts of clauses can prove costly to employers. Courts will even be reluctant to want to modify them. On its face, the clause excluded an employee from taking any position with another company that engages in the same business, without regard to whether that position is similar to the prior position held. Accordingly, it was argued that the covenant was “too restrictive” and that the “covenant bars him from taking positions with those companies extend beyond roles that were similar to those he previously held to any position whatsoever at other companies in the industry.” The argument extended so far as to say that he couldn’t even work as a janitor for another company. The question of the justification of broader restrictions vs. legitimate business interests was the main crux of in which way the court was likely to lean. Continue reading ›

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When entering into the employment domain, covenants are imposed on employees restricting what they can and cannot do once they leave the job. Violations and restrictions are what employers often look for when they wish to seek enforceability of a contract that was entered into when employees decide to move elsewhere. Typically, such agreements prohibit the competing with an ex-employee for a certain period after the employee has left the business, or prevents the ex-employee from soliciting or dealing with customers of the business by using knowledge of those customers gained.  This issue was again a reminder in the case of Dumrauf, where there was a covenant to be found and the Courts later deemed it to be unenforceable because it was too restrictive.

Generally speaking, a “one size fits all policy” when drafting restrictive covenants, will risk them being unenforceable. This is especially if the demand is unreasonable or not necessary to protect legitimate business interests.  In this specific case, the District Court examined the whether a covenant that an employer-employee entered into was able to prohibit any work for his new employer within 50 miles of an office pursuant to a covenant not to compete Dumrauf signed while working for his previous employer.  On its face, the clause also excluded him from taking any position with another company that engages in the same business, without regard to whether that position is similar to a position Dumrauf held. The termination was at will, as he resigned.  Majority of the work that he was now to be involved in meant dealings with a new client base, mainly in other states.  Accordingly, he argued that the covenant was “too restrictive” and that the “covenant bars him from taking positions with those companies extend beyond roles that were similar to those he previously held to any position whatsoever at other companies in the industry.”  The argument extended so far as to say that he couldn’t even work as a janitor for another company.  For such reasons, the grammar and application of the clauses in the employment agreement were carefully scrutinized. Deliberations then led to considerations of whether this would even affect the business interests.  The question of the justification of broader restrictions vs. legitimate business interests was the main crux of in which way the court was likely to lean.  This is exactly why scope, grammar, and context all matter in the phrasing of such contracts.  Courts have the power over it to modify the terms of the agreement but only where the intent of parties is made known.  Otherwise, such terms have the potential to become unenforceable, especially in unfair circumstances.  That is why the Court did not consider this case as being eligible for modification.  You can view the opinion here.

It remains to be seen whether or not more Illinois state courts will follow the application of this decision.  The lessons we can learn from this is to always consider the grounds on which contract agreements are being drawn.  Records of discussions to make intent clear, to ensure fairness, clarity, and definition of business interests at stake are important.  The risks of losing to unenforceability are increased if the above factors are not shown and where too many restrictions with are overly broad can apply.  Continue reading ›

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Trendy big-city restaurants are often here today, gone tomorrow. Such is the case with Grace, a hot West Loop eatery that earned three Michelin stars, a bevy of industry awards, and was the most coveted reservation in Chicago before its owner abruptly closed the restaurant late in 2017. Now, Grace’s former star chef and manager/sommelier are suing to void their noncompete employment agreements.

Head chef Curtis D. and general manager Michael M. were allegedly working together at Avenues restaurant in Chicago’s chic Peninsula Hotel, when they met Michael O.  Curtis and Michael M. had discussed opening their own restaurant which they wanted to name Grace, and found an eager investor in Michael O., who had no experience in the culinary industry. The three went into business together in 2011.

The complaint filed February 20 in Cook County Circuit Court describes the high-priced Grace restaurant as an immediate success upon its opening in 2014 and a “culinary jewel” of the city. It was reportedly profitable within eight months, and Michael O. recouped his entire $3 million investment in the restaurant within several years.

The plaintiffs claim their employment agreements, executed in 2012, were drafted by Michael O.’s attorneys and presented to them without the advice of their own counsel. The agreements contained covenants not to compete for 18 months following termination of employment.

They claim they were led to believe they were receiving ownership rights at the time they signed, when in fact they wouldn’t have the right to share in Grace’s profits for five years. Then the pair would each begin receiving a one-third share of the restaurant’s net revenues. Continue reading ›

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Courts and now legislators are competing against the trend of non-compete clauses in employment agreements.

For it is Democratic leaders that have joined the bandwagon in terms of wanting to prohibit the use of covenants not to compete nationwide. Per Senator Warren’s press release, implementation of the clauses will reduce bargaining power for employees, stifle competition and innovation.  All of that combined hurts Americans and their opportunities. This will eventually, in turn, give greater power to the Department of Labor.

If legislation was in place, there will most likely be a ban through fines on employers who either fail to notify employees that non-compete agreements are illegal or who require employees to sign covenants not to compete. Such a bill would specifically enact a law to protect its trade secrets. As it stands, no legislation is in place that would not allow that to happen. Continue reading ›

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Some states, such as California, North Dakota, Montana and Oklahoma already ban non-compete agreements throughout the state, including agreements that were signed in other states where non-compete agreements are recognized. But now Democratic U.S. Senators are looking to expand such bans all over the country.

Elizabeth Warren, Ron Wyden, and Chris Murphy have come together to propose what they call the Workforce Mobility Act (WMA). If it makes it through Congress, the new federal law would place a nationwide ban on companies writing non-compete agreements into their employment contracts.

Non-compete agreements were first used only with high-level executives and they were designed to prevent those executives from going to work with a competitor and taking trade secrets and/or client relations with them. While such actions would clearly harm their former employer, and many businesses have successfully proven that their non-compete agreements protect only their legitimate business interests, non-compete agreements have become increasingly stringent, while at the same time more widespread, in the past decade or so, further inhibiting employment opportunities for workers.

While the first non-compete agreements included limits on both geography and time (usually six months to a year), companies have continued to extend these limitations, some going so far as to forbid even minimum-wage workers from going to work for any competitor anywhere in the world, thereby purportedly limiting those workers’ ability to find new employment.

Employee advocates have long warned about the unfairness of non-compete agreements and their effect of keeping workers chained to their employer. It inhibits a worker’s ability to grow as an individual and also gives companies more opportunities to take advantage of their workers, especially when such agreements are combined with arbitration agreements, in which any dispute between the company and their employers are required to be settled in arbitration, where the employee is at a distinct disadvantage. Continue reading ›

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Sometimes a stray email is all it takes to send things into a spiral.

In the case of Karen D’Onofrio and her former employer, Vacations to Go, such a stray email led D’Onofrio to sue her employer for allegedly violating her rights under the Family Medical Leave Act (FMLA). The cruise company responded by countersuing her for allegedly violating the non-compete clause of her employment contract.

The issues involved in the case go back to 2011, when D’Onofrio’s husband, Michael, was injured in a car accident. Three years later, he bought a franchise from a company that sells travel-related products and services, including cruises. As part of his application to buy the franchise, Michael included a screenshot of his wife’s sales records, although the picture in question did not include any client names.

A few months after Michael bought the franchise, D’Onofrio asked for leave from work under the FMLA so she could take care of her husband. She was given the option of taking unpaid leaving or working from home a few days out of each week and she decided to go with the latter. Then she allegedly attended a training session for her husband’s franchise while she was on leave and did not respond to messages from clients of Vacations to Go. When a manager sent an email incorrectly stating that D’Onofrio no longer worked for the cruise company, D’Onofrio assumed she had been fired. She was wrong, but she still sued Vacations to Go for violating her rights under the FMLA. Continue reading ›

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