2008 In Review: Top Five Developments In Non-Compete Law

We've reached the end of the year, and my first month of writing this blog. I hope to continue this for many years to come. There's no doubt 2008 was a significant year in non-compete developments. I don't have a Top 10 List for you, but rather an extended Top 5. Here are the Top 5 Developments in Non-Competition Agreements for 2008.

5. Idaho Passes New Non-Compete Legislation: Effective July 1, 2008, Idaho enacted a new non-compete law. As with many states, Idaho had operated solely under the common law. The new legislation codified much of the common-law concerning the requirements of reasonableness, but identified several “legitimate business interests” that an employer may assert in seeking to enforce a non-compete clause. The most significant change is the requirement that the non-compete agreement relate only to key employees or independent contractors. The new statute actually defines those class of persons and provides a rebuttable presumption that anyone who is among the highest 5 per cent in terms of compensation qualifies. Also significant is the change in the law that a non-compete term cannot exceed 18 months from the date of termination, unless an employer specifically gives extra consideration to an employee to sit out longer. In addition, the employer is granted some presumptions of reasonableness if the term is 18 months or less, and if the geographic area of restriction is confined to where the individual “provided services or had a significant presence or influence.” Finally, courts must modify agreements that are overbroad.

4. Massachusetts Legislator Considers Introduction of Law Banning Non-Competes for All Employees: Inspired by the growth of the high-tech economy in California (where non-competes are void), one Massachusetts legislator is considering legislation to bar non-compete agreements entirely within that state. Will Brownsberger admits to a dual motivation for seeking a substantial change in the law: (a) preventing organizations from taking advantage of average, mid-level laborers who have no bargaining power and are subject to inherently unfair restraints; and (b) keeping talented engineers in Massachusetts. Most experienced employment law attorneys agree that non-compete agreements are viewed less favorably the farther west one migrates, where economic libertarianism tends to flourish. On the East Coast, the bias tilts heavily towards the employer. Whether this movement gains traction in Massachusetts may portend a shift away from regional trends in non-compete law.

3. Louisiana Amendments Extend Permissible Uses of Non-Compete Agreements: Louisiana is one of a handful of states that regulate non-compete agreements through a combination of statutory and common law. Effective August 15, the Louisiana Legislature amended LSA-R.S. 23:921 to expand the permissible scope of non-compete agreements. Now, corporations, partnerships and limited liability companies may enter into non-compete covenants with shareholders, partners or members (as the case may be) once their ownership interest in the organization ends. Previously, these types of arrangements were not permitted under the Louisiana statute, and by operation of the default clause against restraints of trade, they were void.

2. California Supreme Court Rejects “Narrow Restraint” Rule: By now, most attorneys are aware that non-compete agreements are invalid restraints of trade under California Business and Professions Code Section 16600. A number of Ninth Circuit cases had tried to limit the application of Section 16600 and impliedly created a “narrow restraint” exception, which basically said that non-compete clauses were acceptable if they barred employees from pursuing only a small or limited part of his or her trade. However, in Edwards v. Arthur Andersen, 189 P. 3d 285 (Cal. 2008), the Supreme Court of California rejected the so-called “narrow restraint” doctrine. In fact, the narrow restraint was anything but. The 18-month non-compete at issue prevented a high-level tax manager from working with any client for whom he conducted professional services or any client of the office (Los Angeles) to which he was assigned. In most states, this is called a customer non-solicitation clause. In Illinois, it is subject to the same standard of reasonableness as any non-compete contract. For professionals and sales employees, it is tantamount to a general non-compete clause barring work in the industry. The Court expressly rejected the exception and upheld a strong public policy against employee non-compete agreements.

1. The Papermaster Case: The year’s most high-profile case is also the most significant. A discussion of IBM v. Papermaster can be found by tracking back to my earlier post.

That's it for the year. As the calendar turns, my first full year with this blog. Stop back often!