State Legislatures Take Aim at Restrictive Covenants but Rarely Hit the Target
As unemployment numbers remain high, state legislatures are taking aim against employers’ use of restrictive covenants, including non-competition, non-solicitation, and non-disclosure provisions. The goal is to reduce unemployment by allowing employees a broader range of employment opportunities. However, these laws pose a serious risk to employers trying to protect confidential information, trade secrets, and business relationships. Here is the latest from two East Coast states.
The New Jersey legislature is considering a bill that would exempt any individual eligible for unemployment benefits from his or her most recent employer’s covenant not to compete, solicit, or disclose. Consider a scenario in which an employee is fired for incompetence. Under this proposed statute, the employee could be hired by a competitor and disclose customers’ names, inventions in the works, and even directly solicit customers of the former employer. All of this would be allowed even though the employee signed a contract promising not to do this. If this law passes as written, employers will have no ability to protect themselves from such unfair competition.
The Connecticut General Assembly just approved a measure that does not go as far as the New Jersey proposal, but may not be the end of this initiative in Connecticut. Under the Connecticut statute, if an employer merges with or is acquired by another company and, as a result, presents an employee with a noncompete agreement as a condition of continued employment, the employer must provide at least seven days for the employee to consider the agreement. The employee may waive the right to this notice, but only in a separate document. The Connecticut General Assembly had considered a much more onerous proposal that would have applied in all non-compete situations and would have allowed employees who did not get at least ten business days to consider the noncompete to sue for damages and attorneys’ fees.
Other states considered, but did not pass, proposals that would limit the use of restrictive covenants. For example, Minnesota and Virginia recently considered legislation that would have voided nearly all non-competition agreements, excluding only agreements between partners or LLC members and agreements involving the sale of a business.
Brody and Associates regularly provides counsel on employment agreements, covenants not to compete, and employment litigation in general. If we can be of assistance in this area, please contact us at email@example.com or 203.965.0560.