June 2016
James B. Sherman, Esq.
Employment agreements that
restrict employees from working for a competitor after they leave or are fired,
have become increasingly common. Indeed,
these agreements have become so prevalent in today’s workforce that they are
coming under fire from an unlikely source - state attorneys general, through
lawsuits! Perhaps this new (and
disturbing) trend should not come as such a surprise. With so many employees being required to sign
restrictive covenants as a condition of employment, it is getting harder and
harder for them to leave their jobs for another in their chosen field. Similarly, employers looking to hire are
seeing the pool of qualified applicants diminished by the fact that many are
saddled with post-employment restrictions from an agreement with their prior
employer. In the past year, states have begun suing
employers in court over their alleged unreasonable use/overuse of non-compete
agreements. Illinois became the most
recent state to join this trend when Attorney General Lisa Madigan, filed a
lawsuit against sandwich maker Jimmy Johns, in Illinois state court on June 8th. Employers should take
notice of these government lawsuits because the legal theories relied on in
Jimmy Johns’ and other cases recently filed around the country, could just as
easily apply in Minnesota, Wisconsin and most other states!
The case against Jimmy Johns
alleges that the company is violating Illinois state law by requiring unskilled
sandwich makers and delivery drivers to sign a non-compete agreement banning
them from other, similar jobs during and for a specified period following their
employment. The government’s lawsuit asserts
that Jimmy Johns has no legitimate business interest that would justify such
restrictions on employees in these sorts of jobs. However, what is unique about
this case is that Attorney General Madigan is alleging that using a non-compete
agreement for employees who essentially pose no threat to the employer if they
should leave and go to work for a competitor, constitutes a violation of the
Illinois Consumer Fraud and Deceptive Business Practices Act. This raises the
stakes, since this law could allow for the recovery of damages as well as
punitive damages and attorney fees against the defendant. The complaint asserts that unless an employer
has a legitimate, protectable business interest that cannot be secured by means
other than a narrowly drafted noncompetition agreement applicable to each
employee who is required to sign one, such an agreement harms the employees as
well as the general public by decreasing employee mobility, stagnating wages
and diminishing the pool of available workers.
Employers outside Illinois should
not feel they are immune to similar lawsuits. Just this month, another employer defendant, Employment
360, which is owned by Lexis Nexis Legal & Professional, settled a lawsuit
brought last year by New York’s Attorney General. The suit challenged 360’s use
of non-compete agreements for its editorial employees, on grounds that the
restrictive covenants were too broad and therefore, constituted an unlawful
restraint of trade. The settlement effectively calls for 360 to notify its former
employees that their non-compete agreements are no longer in effect and they
are free to work wherever they please.
Minnesota and other nearby states
(such as Wisconsin) have their own Deceptive Trade Practices Acts similar to
that of Illinois, and the courts in these and every state recognize that
unreasonable restraints of trade are illegal. Therefore, it is likely only a
matter of time before Minnesota and other nearby states begin to see
unsuspecting employers dragged into court in lawsuits by the attorneys general
in their state, over their use of non-compete agreements if alleged to be
unreasonable.
So what
are Minnesota and employers elsewhere to do in light of this growing assault on
noncompetition agreements? First, don’t overreact by starting to shred all
non-compete agreements. Used properly,
noncompetition and other restrictive covenants can save an employer’s business
from unfair competition, poaching by competitors and loss of highly
confidential information and trade secrets.
However, simply assuming that your agreements will pass muster if
challenged in court, ignores the growing hostility toward restrictive
employment agreements and the many new legal theories being used to challenge
them. Not only must the agreement itself
be narrowly drafted to secure only clearly protectable business interests, but it
must also be required only of employees who would pose a clear danger to those
interests if they were to go and work for a competitor. Therefore, the sensible approach is to have
all restrictive agreements evaluated by an experienced attorney who is
knowledgeable in this highly specialized area of the law. Only then can an employer determine whether to:
(1) keep its existing agreements unchanged; (2) modify existing agreements and/or
pare down which employees are required to sign them; or (3) shred unreasonable
agreements before being ordered to do so by a court in a lawsuit brought by the
government.
------------------------------------------------------
James B. Sherman has nearly 30
years of experience drafting non-compete and other restrictive employment
agreements, as well as litigating their enforceability in state and federal courts
in Minnesota, Wisconsin, Illinois and numerous other states. He is licensed to practice in the state and
federal courts of Minnesota, Wisconsin and Illinois and he has represented
employers in many other states by special permission or with the assistance of
local counsel in those states in which he is not licensed. For questions about this article, or to
discuss how Mr. Sherman can assist your company in evaluating the
enforceability and use of its noncompetition, non-solicitation, or confidentiality
agreements, as well as related restrictive covenants, please contact his legal
assistant: Tyler Birschbach, by email, at tybirschbach@wesselssherman.com or by
calling (952) 746-1700 .
