Your Facebook Status Update Could Cause Your Old Employer to Sue You – Newsletter 1

I. Employers Go Overboard With Non-Compete Clauses

II. The Rise of Non-Compete Clauses in Employment

III. The Spread of Non-Compete Surveillance to Social Media

IV. The Current Common Law and Statutory Law of Contracts on Non-Compete Agreements

V. Pushback in State Legislatures Against Employee Non-Compete Agreements

 

I. Employers Go Overboard With Non-Compete Clauses

Employment contracts that prohibit former employees from recruiting their former co-workers to join new ventures have been highlighted in recent articles at CBS Marketwatch, “More firms requiring non-compete agreements”, July 8, 2013, and “Tweeting about a new job can get you sued”, August 2, 2013, and in the Wall Street Journal, “Litigation Over Noncompete Clauses is Rising”, August 14, 2013.

Here is the bottom line on this rising trend. Robert Noyce co-founded Fairchild Semiconductor in 1957 by joining seven of his departing Beckman Instruments colleagues. They were dissatisfied with their manager William Shockley, the co-inventor of the transistor. Shockley labeled the defectors “the traitorous eight”. In 1968, Robert Noyce left Fairchild Semi with fellow Beckman/Fairchild employee Gordon Moore, and with Andy Grove, to co-found Intel Corporation.

Fairchild Semi produced the first commercial integrated circuits/microchips. Intel produced the first commercial microprocessors. If Noyce, Moore and Grove had been required to sign employment “covenant not to compete” agreements by Beckman Instruments or Fairchild Semiconductor, neither Fairchild Semi nor Intel might have ever been born. Imagine what today’s world might be like without those cornerstones of Silicon Valley.

My ebook, Every1’s Guide to Electronic Contracts, covers the basics of “covenants not to compete” in Chapter A.7, d) ii). This newsletter expands upon that coverage to note the increasing employer surveillance of former employee status updates and “tweets” in order to look for non-compete violations. It also notes some major differences between California statutes and judicial decisions on the enforceability of covenants not to compete and those of other states, such as Massachusetts.

II. The Rise of Non-Compete Clauses in Employment

Enforcement by employers of employee agreements not to compete with them after leaving the business can be done either through settlements of threatened or actual litigation or by litigation judgments. If done through settlements, no public data results from which to judge any increase in such activity. At least according to anecdotal statements by employment lawyers, however, “Now it’s everywhere”, and “Corporations are overplaying their hands in state courts”. (CBS Marketwatch, “More firms requiring non-compete agreements”)

One academic study showed that the percentage of CEO-level contracts with non-compete agreements increased from 72% to 79% after 2000. One law firm study showed that published court decisions involving non-compete agreements increased from 400 in 2000 to 760 in 2012. A Yale University study indicated that enforcement of non-compete agreements appeared to stifle innovation, business startups and job growth. (Wall Street Journal, “Litigation Over Noncompete Clauses is Rising”) Something is causing state legislatures, including those in New Jersey, Minnesota, Massachusetts, and Virginia, to consider new legislation limiting the enforcement of such agreements.

III. The Spread of Non-Compete Surveillance to Social Media

If an employee leaves to join a former employee at a new company, their former employer might suspect that she was recruited in breach of a non-compete agreement. The popularity of social media enables employers to monitor many online communications to find possible recruitment by former employees.

Social media status updates, title changes, and friend requests have been questioned by employers seeking to prove a breach of a non-compete agreement, if they coincide with the hiring away of a former colleague. Although the motives behind such posts are often difficult to prove, a letter from a former employer, or a lawsuit by them seeking to prevent a hiring, might be enough to “chill” the online speech of a former employee without the necessity of a court order or judgment. Some employers have even added to employment agreements complete prohibitions on hiring former colleagues for a set period of time, and explicit references to specific social networks as prohibited methods of recruitment by former employees. (CBS Marketwatch, “Tweeting about a new job can get you sued”) “Freedom of contract” and public policy intersect in state common law and legislation to determine how each state treats the enforcement of non-compete agreements.

IV. The Current Common Law and Statutory Law of Contracts on Non-Compete Agreements

Contract law is mostly state law in the United States. Within the due process and other limitations of the U.S. Constitution, and its Article I, Section 10, provision that “No State shall…pass…any Law impairing the Obligation of Contracts”, each state is free to strike its own balance of rights between contract parties.

Two states that have a major impact on high technology industries have taken very different approaches to the enforcement of non-compete agreements. As described in Chapter A.7, d) ii) of Every1’s Guide to Electronic Contracts, most state courts and legislatures balance non-compete agreements against the public interest, including its interest in free and fair competition. For example, Massachusetts statutes prohibit completely the use of non-compete agreements to restrict the recruitment of physicians, nurses, social workers, and broadcasting industry employees.

In the 2012 Massachusetts decision in Invidia, LLC v. DiFonzo, a trial judge determined that a hairdresser’s former salon was not entitled to a preliminary injunction prohibiting her from working as a hair stylist within ten miles of the old salon for two years. The judge found that she had not solicited her former clients by merely posting her new salon employment on Facebook. The post was followed by a former client’s public message that she would see the stylist at her new salon.

The judge found that “It would be a very different matter if Ms. DiFonzo contacted [the client] to tell her that she was moving…”. The judge wrote “one can be Facebook friends with others without soliciting those friends to change their hair salons…So long as they reached out to Ms. DiFonzo, and not vice versa, there is no violation of the non-solicitation agreement”. Invidia also did not prove that Ms. DiFonzo had taken its client list.

The Massachusetts common law standards for enforcement of an agreement to not compete with a former employer are: 1) a covenant not to compete is enforceable only if it is necessary to protect a legitimate business interest, reasonably limited in time and space, and consonant with the public interest, and 2) a covenant not to compete must be no more restrictive than necessary. The judge allowed for the future enforcement of a two-year, ten-mile non-compete agreement against the hairdresser, but only if her former salon proved that she actually solicited former clients.

In contrast to Massachusetts, California has one of the strictest laws against non-compete agreements in the U.S. Enacted originally in 1872, and reenacted in 1941, California Business and Professions Code Section 16600 invalidates all contracts prohibiting non-owner employees from competing with their former employers. The “exception” to this general rule does not allow prohibitions against competition, but only allows an employer to prohibit unfair competition against it by a former employee’s use of trade secrets, including client lists. See Edwards v. Arthur Andersen LLP, which confirmed that the California statute permits no exceptions for “reasonable” restrictions on future employment.

V. Pushback in State Legislatures Against Employee Non-Compete Agreements

The “laboratories of democracy” that constitute the fifty-plus states and territories of the United States offer a limited experiment in the effects of employee non-compete agreements on entrepreneurship and employment. Many factors affect new business formation and job growth. The negative effects of proliferation of employee non-compete agreements on business and job growth, indicated in the academic studies mentioned above, have prompted some state legislatures to propose statutory narrowing of the common law reasonableness standard applied by many states to non-compete agreements.

In 2012, New Hampshire enacted a law that prohibits employers from requiring an employee to sign a non-compete agreement, unless it is presented at the time of, or before, a job offer or change of position. This prevents a current employee from being surprised with a non-compete requirement, but it does not change the reasonableness standard for its enforceability.

In 2013, a bill was introduced in the Massachusetts legislature creating a presumption of unreasonableness for employee non-compete agreements lasting more than six months after employment ends. The employer would have the burden of proof that a longer period is reasonable. Pending New Jersey legislation would make unenforceable any non-compete agreement between an individual and their most recent employer, if that individual qualifies for unemployment insurance. Pending Virginia legislation would generally prohibit employee non-compete agreements, with California-type exceptions for business sellers. Minnesota legislation would also prohibit employment non-compete agreements, except in connection with sales of business interests.

High-technology employees and entrepreneurs have flocked to Silicon Valley from colder climates for many years. Some of these entrepreneurs might also have felt chased away by the chill of state enforcement of employee non-compete agreements. States that are losing the high-technology race for this reason are beginning to recognize their self-imposed disadvantage.