Restrictive Covenants, Trade Secret & Unfair Competition Update

• Jurisdiction: United States,Federal
• Law Firm: Proskauer Rose LLP
• Subject Matter: Employment and HR, Intellectual Property, Contract of Employment, Employee Benefits & Compensation, Trade Secrets
• Author: Mr Joseph O'Keefe, Steven Pearlman, Daryl Leon, Alexandra Oxyer, Alyssa M. Cook, Scott Tan and Jonathan R. Gartner
• Published date: 14 March 2023

Welcome to Volume 1 of Proskauer's Restrictive Covenants, Trade Secret & Unfair Competition Update. In this highly competitive, knowledge-driven global marketplace, a company's ability to protect its trade secrets, human capital and client relationships has become critical to its success and survival. Below is a deeper dive into the latest developments and trends impacting non-compete and trade secret law today.

Edited by Joseph C. O'Keefe and Steven J. Pearlman

Low Wage and Employee Classification Limits on Non-Compete Agreements

Originally published on November 18, 2021 and updated as of January 27, 2023.

Over the past few years, states across the country have sought to limit or reduce the use of employee non-compete agreements. While some have imposed outright bans on such agreements, many more have passed laws that narrow the scope or classification of an employee who may be subject to a non-compete.

A common restriction is to prohibit the use of non-competes for employees who earn below a certain threshold - e.g., annual compensation, hourly wage, percentage of poverty level, or FLSA status. Employers operating in multiple states face a patchwork of regulations and need to keep their non-compete thresholds up to date. Setting calendar reminders for the annual wage updates and following the Proskauer Non-Compete and Trade Secrets page are the right steps to keep agreements compliant as the patchwork evolves.

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Colorado

Non-competes prohibited for employees earning less than $112,500 per year. Customer non-solicits prohibited for employees earning less than $67,500 per year.

Illinois

Non-competes prohibited for less than $75,000 per year. Non-solicits prohibited for employees earning less than $45,000 per year.

Maine

Non-competes prohibited for employees earning wages at or below 400% of the federal poverty level, or $58,320 per year.

Maryland

Non-competes prohibited for employees earning less than or equal to $15 per hour or $31,200 per year.

Massachusetts

Non-competes prohibited for: (i) non- exempt employees; (ii) undergraduate or graduate students participating in internships or short-term employment; employees that have been terminated without cause or laid off; and employees under the age of 18.

New Hampshire

Non-competes prohibited for employees earning an hourly wage less than or equal to 200% of the federal minimum wage ($14.50 per hour or $30,160 per year); or (ii) less than or equal to 200% of the tipped minimum wage in the state.

Nevada

Non-competes prohibited for employees who are paid solely on an hourly wage basis, exclusive of tips or gratuities.

Oregon

Non-competes prohibited for employees earning less than or equal to $100,533* per year.

Rhode Island

Non-competes prohibited for: (i) non- exempt employees; (ii) undergraduate or graduate students participating in internships or short-term employment; employees under the age of 19; and employees whose average annual earnings (excluding overtime, Sunday, or holiday premiums) are less than 250% of the federal poverty level, or $36,450 per year.

Virginia

Non-competes prohibited for employees earning less than Virginia's average weekly wage: $1,343 per week or $69,836 per year.

Washington

Non-competes prohibited for employees earning less than $116,593.18 per year, and independent contractors earning less than $291,482.95 per year.

Washington, DC

Non-competes prohibited for employees earning less than $150,000 per year.

*This number is current as of January 1, 2022.

Advanced Notice: Continuing Trends in State Restrictive Covenant Legislation

In recent years, federal and state lawmakers have been increasingly eager to limit employers' ability to enter into restrictive covenant agreements with their employees. A growing trend is legislation requiring that employers give individuals advance notice (or a "consideration period") before the employee can sign a restrictive covenant agreement. Prior to 2022, only five states (Oregon, New Hampshire, Massachusetts, Maine, and Washington) had such laws on the books. That number almost doubled this past year, as Illinois, Colorado, and the District of Columbia enacted statutes requiring varying degrees of advance notice.

I. Illinois

Under the Freedom to Work Act, effective as of January 1, 2022, Illinois employers must advise prospective and current employees in writing to consult with an attorney before entering any agreement that contains either a covenant not to compete or a covenant not to solicit. 820 ILCS 90. Furthermore, the employer must provide the individual with at least fourteen calendar days to review the restrictive covenant before signing it. Although an employee may voluntarily elect to sign the restrictive covenant agreement before the expiration of the 14-day consideration period, the entire period must still be provided to the individual.

The Illinois Freedom to Work Act goes on to define "adequate consideration" for restrictive covenant provisions in such a way that, even if the employer follows all of these steps, the restrictive covenants will be rendered unenforceable unless the employee works for the employer for at least two years after signing the agreement containing the non-compete or non-solicit provision. Before this legislation, Illinois statute did not specify a set length of tenure as a precondition for non-compete agreements.

II. Colorado

Effective as of August 10, 2022, before entering into a non-compete agreement with either a prospective or current employee, Colorado employers must provide the individual with advance "notice of the covenant not to compete" and the "terms of the covenant not to compete." Colo. Rev. Stat. ' 8-2-113(4).

For prospective employees, the employer must provide the individual with the notice, and the terms of the proposed non-compete beforethe prospective employee even accepts an offer of employment.

For current employees, the employer must provide the employee with the notice and the terms of the proposed non-compete at least fourteen days before the earlier of (a) the effective date of the covenant; or (b) the effective date of any additional compensation or change in terms and conditions of employment that would provide consideration for the covenant.

In both cases, the required notice of the non-compete must be provided to the employee or prospective employee in "clear and conspicuous terms" and must be signed by the worker. Although it appears that employees should be able to sign the notice and the non-compete agreement before the entire consideration period has elapsed, the non-compete would still not be effective until fourteen days from the date of the notice.

The statute's required notice must be presented in a separate document from the actual non-compete agreement and signed by the employee. This means that employers must obtain two signed documents to effectuate a non-compete - first, the notice document, followed by the agreement containing the non-compete provision itself.

III. Washington, D.C.

After years of delays and amendments, the District of Columbia Ban on Non-Compete Agreements Amendment Act of 2020 finally went into effect on October 1, 2022, as modified by the District of Columbia Non-Compete Clarification Amendment Act of 2022. D.C. Law 24-175. While the statute prohibits most non-compete agreements, unlike the prior iterations of the proposed legislation, the implemented version allows employers to continue to utilize such agreements for highly compensated individuals and some additional excluded categories of employees.

To make permissible non-compete agreements enforceable, employers are now required to provide a copy of the non-compete agreement, in writing, to a prospective employee at least fourteen days before the individual commences work for the employer. For employers seeking to bind current employees to a new non-compete agreement, the employer is also required to provide a copy of the non-compete, in writing, to that individual at least fourteen days before the employee is required to execute it.

Unlike other jurisdictions, the D.C. statute also delineates specific language that must be included in the notice to current and prospective employees, along with a copy of the non-compete agreement. The language...