Florida's Non-Compete Law Is, Apparently, "Truly Obnoxious"

One of the most important issues in analyzing any non-compete agreement is choice of law. My experience is that at least 9 out of 10 contracts contain explicit choice-of-law clauses, which describe in the contract which state's law will govern enforcement.

A few years ago, I represented the prevailing defendants in Tradesman Int'l v. Black, 724 F.3d 1004 (7th Cir. 2013). Judge David Hamilton's concurring opinion in that case illustrates the importance of choice-of-law clauses and how predictability over which state's law applies is essential to litigation strategy. It is an extremely thoughtful and interesting opinion, and my post discussing it can be found here.

There are a number of red-flag states where choice-of-law issues are bound to come up. Certainly, if California has any kind of a nexus to the proceedings, then choice of law will be front and center. Other states, like Wisconsin, also pay particular attention to clauses that select another state's law. And Florida, by virtue of its pro-enforcement stance, is a third example.

On this score, Illinois courts will not enforce Florida choice-of-law clauses because they are contrary to our state's public policy. Recently, New York courts have followed this lead and have held that a Florida choice-of-law provision in an employment non-solicitation covenant is unenforceable and contrary to New York public policy.

The case is Brown & Brown, Inc. v. Johnson. The Court of Appeals of New York set forth the standard for invalidating a contractual choice-of-law clause: the foreign law must be "truly obnoxious." Now, that's a standard.

So what's the problem with Florida law, and why do some courts view its stance on non-competes as contrary to public policy. The New York court identified the following:

1. The employee largely bears the burden of proof to show that enforcement is not necessary to protect an asserted business interest.
2. Courts many not consider hardship to the employee from the covenant's enforcement.
3. Courts may not use rules of contract construction that would require a court to construe a vague or unclear contract against the employer.

Overall, the New York court - like the courts in Illinois before it - were concerned with "Florida's nearly-exclusive focus on the employer's interests" in contrast with the traditional balancing test that governs enforcement.

Going back to my post from two years ago when I analyzed Judge Hamilton's concurring opinion in Tradesman, there still is no clear test that I can find to determine when a state's law contravenes another state's public policy. I raised three possibilities:

1. The legislature has spoken on the issue and declared the state's public policy, much like California has done.
2. A state's case law reflects a clear, uniform rule applicable without regard to the specific facts of the case. An example would be a court's refusal to partially enforce an overbroad agreement.
3. The difference between the chosen state and the forum state would be outcome-determinative.

After reading Brown & Brown, I might add a fourth possibility: the chosen state's rules disproportionately favor the employer and undermine the foundation of the rule-of-reason analysis.

Mid-Year Legislative Update - Arkansas, New Mexico, and ... Jimmy John's?

This year, we have seen a slight uptick in proposed legislation concerning non-compete agreements. In previous posts, I've written about legislative efforts in Wisconsin, Washington, and elsewhere. However, while most bills stall out, a few gain momentum. And recently, we have two actual legislative enactments that will change existing law.

Arkansas

The first new law comes from Arkansas, where Gov. Asa Hutchinson signed Act 921. This new law allows a court to enforce reasonable aspects of a non-compete agreement. Previously, Arkansas courts would not allow a court to blue-pencil an agreement that would allow for partial enforcement. That is, an agreement with any overbroad sub-parts rendered the whole document unenforceable. A court's ability to sever offending provisions is weapon in an employer's enforcement arsenal and encourages overbroad drafting.

Act 921 also provides for a presumption that a covenant lasting two years or less is reasonable. Finally, Act 921 specifies an array of employer protectable interests, which include goodwill, confidential information, and training. (The list also identifies protectable interests as "methods" which I found odd.)

Act 921 takes effect on August, 6, 2015.

New Mexico

In April, New Mexico enacted Senate Bill 325, which limits the enforcement of non-competes for health care practitioners (which is defined to include physicians, dentists, podiatrists, and nurse anesthetists). The law is available here.

The law, however, contains a number of significant limitations. First, it does not apply to heath care practitioners who are shareholders or partners in a practice. Second, it does not prohibit a practice from binding a health care practitioner to a non-solicitation provision with regard to patients and employees of the practice (as long as the covenant is 1 year or less). And third, it does not preclude use of a liquidated damages provision. Therefore, we can expect to see physician employment contracts track the language of the statute and (in all likelihood) tie a breach of a non-solicitation covenant to some formula for liquidated damages.

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Nationally, we have a new bill tied to enforcement of non-compete agreements and, of course, it arises out of the infamous Jimmy John's case. Illustrating once again that there is no limit to legislators' imagination when it comes to giving legislation creative and idiotic names, several Senate Democrats have backed the Mobility and Opportunity for Vulnerable Employees (MOVE) Act. A copy of the bill is available here.

The essence of the bill is that it would bar use of non-competes for low-wage workers, generally defined as those earning less than $15 per hour. A violation would result in a fine of up to $5,000 per employee subject to the non-compete, and the law would empower the Secretary of Labor to investigate complaints concerning the improper deployment of non-competes. The law also contains a posting requirement (the violation of which is punishable by a flat $5,000 fine) that would tell a low-wage employee of the ban on non-competes.

The bill also would require employers who propose to use a non-compete to disclose this to the employee before employment and "at the beginning of the process for hiring" the employee. While some states have examined this kind of notice requirement in recent years, this would mark a substantial change in the law. Best practices certainly call for up-front disclosure, but it is still very common for employees who leave a job and accept a new one to see a non-compete on the first day of work.