Pautsch, Spognardi & Baiocchi Legal Group LLP
Monday Morning Minute
In This Issue
Quiz Answers: Covenants Not to Compete
NLRB to Address Joint Employer Doctrine
                  September 17, 2018


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1.    If you do not have a covenant not to compete agreed to and executed by an employee who leaves your company and takes trade secrets with him or her, you are left without a remedy.

FALSE. There are a variety of other remedies available in such a situation, most prominently, a suit under your state's version of the Uniform Trade Secrets Act.

2.    The drafter of the covenant can choose which state's law to apply to the agreement and this choice will be honored so long as the state chosen is the state the drafter resides in. 

FALSE. A drafter can choose to apply the law of any given state to the agreement but the court where the suit is ultimately decided will decide whether that chosen state has enough ties to the dispute to apply the chosen law and/or whether application of the chosen state's law would offend the public policy of the forum state. Usually the simple fact that the chosen state is the residence of the drafter of the covenant is not enough standing alone to let the choice stand particularly if other factors point to the application of another state's laws. 

3.   It is permissible for a company to terminate an employee for refusing to sign a covenant not to compete.

TRUE IN SOME STATES, NOT IN OTHERS. Wisconsin's Supreme Court has ruled that such a termination is not unlawful as it does not give rise to a retaliatory discharge.  However many other states either have not ruled on this question or have statutory provisions or case law which would support the idea that such a discharge would be unlawful.

4. If you decide to have an incumbent employee sign a covenant not to compete, it is not necessary to give that employee additional consideration for his or her execution of the agreement.

TRUE IN SOME STATES, NOT IN OTHERS.  Again, the answer to this seemingly basic and fundamental question will vary by state. Illinois, for example has seen its appellate courts decide a number of recent cases that hold that some substantial period of continued employment after the execution of a covenant is necessary to provide consideration for its enforcement, while courts in other states, including Wisconsin, Ohio and Indiana have pointed to the opposite result which is that any period of employment after execution is sufficient consideration for enforcement.

5. California and New York both have laws that largely forbids the use of covenants not to compete in the private sector workplace.

TRUE as to California, and FALSE as to New York where such covenants are enforceable if they are reasonably drawn as to time and place, supported by consideration and serve a protectible interest.

6. Wisconsin and Arizona both have laws that largely restrict the use of covenants not to compete

FALSE, if they are reasonably drawn as to time and place, supported by consideration and serve a protectible interest.


7. It is permissible top have all of your employees sign a covenant not to compete.

TRUE. It is permissible,  but it is  a very bad idea to do so. This is so because for such a covenant to be enforceable as to a particular employee that employee must be considered as having a "protectable interest"( see answer to # 10 below). To ask each and every employee to sign a covenant------even those with no access to any sort of competitive data----undercuts the company's position that it should be able to maintain in court that it is sincerely, and in good faith, simply trying to protect it valuable competitive information.

8. Massachusetts and Illinois have passed legislation in recent years limiting the application of covenants to employees above certain wage levels. 

TRUE. These recently enacted statutes were analyzed        in our 8/27/18 MMM. 

9. Sometimes it is advisable to "race to the courthouse" in one state as opposed to another to secure an injunction enforcing a covenant against an employee who has left your company.

TRUE. In many instances, it may be advisable to do this. For example, an employee who desires to work in California, but is covered by a covenant that tries to prevent her from working in competitive industry on a nationwide basis and was originally executed in Wisconsin and expressly has chosen Wisconsin law to apply, would probably be well-advised to seek a declaratory judgment from a California court allowing such employment.

10. In order for a covenant to compete to be enforceable the employee against whom it is to be enforced must be deemed to have possessed a "protectable interest".

TRUE.  This is the most important point of all in connection with the enforcement of covenants. Defined somewhat differently in each state, the concept is essentially that the employee must have been trusted  with sufficient employer -generated competitive and confidential information and data in connection with her employment such that it is worthy of protection by the courts.

If you need or want  to discuss the answers to one or more of these questions or assistance on this topic generally, please drop us a line or give us a call.
The NLRB requested comments on Friday, September 14, 2018 on a proposed rule to establish the standard for determining joint employer status under the National Labor Relations Act.  The rulemaking effort was taken several months after the vacation of the Hy-Brand decision because of ethical concerns within the Board.    
Hy-Brand overturned the Obama-era Browning-Ferris "potential" control standard.  However, Hy-Brand was short-lived after the NLRB inspector general determined that Board Member William Emanuel should have recused himself from participation in the decision.  This debacle led to the revival of the Browning-Ferris standard, which currently is in effect.   Under Browning-Ferris, joint employer status exists where one employer has the "reserved or potential" authority to control the labor relations of another employer's employees. 
Under the proposed rule, an employer may be found to be a joint-employer of another employer's employees only if it possesses and exercises substantial, direct and immediate control over the essential terms and conditions of employment and has done so in a manner that is not limited and routine. Indirect influence and contractual reservations of authority would no longer be sufficient to establish a joint-employer relationship.  Comments to the proposed rule are due November 13, 2018.
If you are an employer, franchisor, or franchisee who would like to comment on the proposed rule, contact any PSB Legal attorney.  

Click here:  if you would like to visit the NLRB's notice and invitation in the Federal Register.

PAUTSCH, SPOGNARDI & BAIOCCHI LEGAL GROUP is a law firm dedicated to finding common sense, affordable solutions for businesses to labor, employment, human resource and general business needs. With over 75 combined years of experience among its 3 founding partners in these areas, we can assist businesses in developing custom solutions to today's tough issues.  And as litigators, who combined have over thousands of trials  "under their belts" before state and federal courts as well as administrative agencies (such as the NLRB) you will find no better advocate and partner. 


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