Non competes and restrictive covenants

New York Is Not Okay with Non-Competes

January 1, 2024 | Bona Law PC

Update: In December 2023, New York Governor Kathy Hochul vetoed the legislature’s proposed prohibition against employee non-competes. The Governor indicated that her “top priority was to protect middle-class and low-wage earners, while allowing New York’s businesses to retain highly compensated talent.” Carve-outs to the bill for highly-compensated employees and executives were discussed, but no agreement as to an income cut-off could be reached. Senator Sean Ryan has said that he expects the legislation to be reintroduced in 2024.

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MMA & Monopsony: MMA Fighters Win Class Certification Bout in Employment Monopolization Case

September 27, 2023 | Bona Law PC

Authors: Luke Hasskamp & Molly Donovan

In yet another important labor-monopsony case, a federal court in Nevada has declared a win for MMA athletes fighting against their promoter’s alleged misuse of monopsony power in the market for acquiring fighters’ services. Class certification has been granted to MMA fighters accusing their promoter of locking them into exclusive contracts that deterred fighters’ mobility and suppressed their wages for fighting bouts. Cung Le v. Zuffa, LLC, No. 2:15-cv-01045-RFB-BNW, 2023 WL 5085064, 2023 U.S. Dist. LEXIS 138702 (D. Nev. Aug. 9, 2023).

The Facts. MMA is a combat sport—a mix of boxing, wrestling, karate and other forms of martial arts. A bout is a competition between MMA fighters in a timed round where a fighter can win by acquiring the most points or by a knockout or submission (the other fighter gives up due to “extreme pain”).

During the at-issue period (2010-2017), Zuffa (defendant) promoted MMA bouts—under the trade name Ultimate Fighting Championship.

During that time, Zuffa treated fighters as independent contractors and compensated them on a bout-by-bout basis: one payment to “show” (participate in a bout) and then another payment (typically in the same amount) to win. This method of compensation was common across all MMA fighters promoted by Zuffa except for a “very small” number of the best fighters who also may have received additional payments at times (e.g., a percentage of the revenues generated by a particular event). Fighters bore their own expenses for training and skills maintenance.

The contracts between Zuffa and fighters contained “exclusion clauses” that required athletes to fight only for Zuffa. These contracts also imposed additional clauses that gave Zuffa significant control over fighters, including (i) the exclusive ability to extend certain contracts automatically; (ii) the exclusive right to cut fighters; and (iii) the right to match a competing promoter’s offer at the expiration of a contract, essentially requiring the fighter to remain with Zuffa whenever Zuffa matched the competing offer.

The Proposed Bout Class. All persons who competed in live UFC-promoted MMA bouts in the United States from 2010 to 2017.

Predominance. Predominance has become the “main event” in antitrust class certification inquiries—the round where a plaintiff can win it or lose it all. To establish predominance, plaintiffs must show (i) conduct that violates the antitrust laws; (ii) that the conduct was commonly applied to the class; (iii) it led to common injury in the class; and (iv) measurable damages provable with evidence common to the class.

Illegal conduct. The class alleges a violation of Section 2 of the Sherman Act, i.e., that Zuffa sought to maintain its monopsony power in the relevant market through exclusionary conduct. In a lengthy analysis, the court held that plaintiffs showed that Zuffa enjoyed monopsony power in a relevant antitrust market—the market for elite professional MMA fighter services. An expert testified that, during the relevant time, Zuffa’s share was between 70 and 90% in the labor-input market. And this market also had significant barriers to entry, including Zuffa’s own “coercive” contracts that “artificially restricted” competitors’ access to fighter talent. As for exclusionary conduct, the court ruled that the required exclusivity and other oppressive contractual provisions (along with related “coercive” conduct by Zuffa) “locked up” fighters, restricting their mobility and suppressing their wages. The court also pointed to Zuffa’s history of horizontal acquisitions as further evidence of a willful intent to maintain market dominance.
Common application to the class. The court found that the relevant contractual provisions applied to all class members, as did Zuffa’s coercive conduct used “consistently” “to induce fighters into re-signing contracts or risk punishment.”
Common injury. Plaintiffs’ expert submitted a regression analysis to show that class members’ wages were artificially suppressed by Zuffa’s conduct. The court ruled that analysis was sufficiently reliable at the class certification stage to establish common injury—rejecting defendant’s “small” criticisms of specific variables and particular data decisions.
Finally, the court held that plaintiff’s expert presented a “coherent methodology for establishing class-wide damages that predominates over any individual damages analysis.”

Total Knockout? No. While the court certified that “bout class,” it declined to certify a separate “identity class” consisting of every fighter whose identity was “expropriated or exploited by the UFC” from 2010 to 2017. The court held that, unlike the bout class, plaintiffs had not presented sufficient expert analysis supporting a connection between the relevant exploitative conduct and suppressed compensation. The court also found it important that the merchandising rights were voluntary and non-exclusive and that fighters in the class varied in notoriety—a difference difficult to capture in an objectively-defined variable. Finally, the court said there was no evidence of an “internal pay structure” for identity rights that was consistently applied across the proposed class.

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California Gets Even Tougher on Non-Competes

September 18, 2023 | Bona Law PC

Author: Molly Donovan & Luis Blanquez

California continues to lead the trend away from non-competes with a new law that packs yet another punch against employers’ use of these very common contractual restrictions on employee mobility.

Non-competes—also called restrictive covenants—typically prohibit an employee from taking employment with a rival firm once their current employment has ended. Their enforceability largely depends on their scope and the applicable state law.

In California, existing law already provides that, with few exceptions, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” And, existing law also prohibits employers from trying to skirt the ban by trying to using forum-selection and choice-of-law provisions against California residents who work in California.

The new law goes even further. It states that non-competes are void regardless of where and when they were signed. It prohibits employers from attempting to enforce unlawful non-competes even if the employment occurred outside California. And finally, the law makes it a civil violation for an employer to enter into a prohibited non-compete. Employees can bring private actions against employers who violate the laws against non-competes, and prevailing employees are entitled to attorney’s fees.

The law was drafted by Orly Lobel, Warren Distinguished Professor of Law and Director of the Center for Employment and Labor Policy at the University of San Diego. Her research reveals that California employers still require employees to sign non-competes even when they are unenforceable under California law. Professor Lobel also found that non-competes continue to “stifle economic development, limit firms’ ability to hire,” “depress innovation and growth,” and are “associated with suppressed wages and exacerbated racial and gender pay gaps, as well as reduced entrepreneurship, job growth, firm entry, and innovation.”

Bona Law has extensive experience counseling companies and former employees about non-competes—an area that is increasingly dangerous under many states’ laws and can also draw scrutiny under federal antitrust law.

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Minnesota is the New California for Non-Compete Agreements

June 5, 2023 | Bona Law PC

Author: Aaron Gott

In May of 2023, Minnesota enacted a new law that broadly bans employee non-compete agreements with few exceptions and also limits the use of forum-selection and choice-of-law clauses in employment agreements. You can read that law here (jump to 66.12).

Note: the Federal Trade Commission is also contemplating a ban on employee non-compete agreements, but we don’t know what that will look like until the final rule is published. We’ve written about the FTC’s proposed rule here and here.

In other words, Minnesota is the new California, which already broadly bans non-competes and prevents employers from getting around California law with forum-selection and choice-of-law clauses to obtain a more favorable law or a more receptive judicial audience outside the state. We’ve been advising both employers and employees on California’s non-compete law for almost a decade.

That isn’t to say Minnesota’s law is now exactly the same as California’s, which we’ve discussed at length in the past. Here’s a quick and dirty run-down of Minnesota’s new law.

Minnesota’s new non-compete law becomes effective July 1, for new agreements only

Minnesota’s new non-compete law becomes effective July 1, 2023. But it only applies prospectively, i.e. to agreements executed on July 1, 2023 or later. This means that employers can still seek to enforce their existing employment non-compete provisions.

It’s important to keep in mind, though, that a sea change in legislative policy like this can often affect judicial decisions relating to the old policy (i.e. existing agreements) down the road. When the Minnesota courts get used to the new paradigm, their view of the old paradigm is likely to change.

Minnesota’s new non-compete ban is broad

The ban is quite broad—it prohibits all non-compete agreements between employers and employees, including executives, those who otherwise have access to trade secrets and other proprietary information, and those who could take considerable customer goodwill with them when they leave.

It also applies to workers, whether they are employees or independent contractors.

There are two direct exceptions: non-competes in connection with the sale of a business, and non-competes in connection with the dissolution of a business.

But Minnesota’s new non-compete ban has limits

The new law is quite specific in two ways: it applies to “covenants not to compete” that apply to an employee’s conduct “after termination of the employment.”

Since the new law only covers “covenants not to compete,” it applies only to (1) “work for another employer for a specified period of time,” (2) “work in a specified geographical area” and (3) work for another employer in a capacity that is similar to the employee’s work for the employer that is party to the agreement”. Further, the law specifically excludes some other types of agreements: nondisclosure agreements and other agreements to protect trade secrets, as well as nonsolicitation agreements.

And since the law only covers work “after termination of the employment,” it does not apply to agreements not to compete during employment. Minnesota’s law allows garden leave arrangements, which means employees remain employees for a certain amount of time, during which they are paid but do not work, and cannot compete.

Minnesota’s new non-compete law grants fees to prevailing employees

This is one area where Minnesota is doing something different than California: employees who prevail in enforcing their rights under the new law can recover attorney’s fees from the employer. This means greater risk and a changed playing field for employers who seek to protect their business interests.

Under Minnesota’s new non-compete law, an unenforceable non-compete doesn’t void the entire contract

Even if a provision of an employment agreement is found unenforceable as a prohibited non-compete, only the prohibited non-compete is void—not the entire contract.

Minnesota businesses should act quickly

Minnesota businesses need to act quickly for a couple of different reasons. The first is that they need to bring their current agreements and templates into compliance with the law in less than 30 days.

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FTC’s Proposed Noncompete Ban Has Already Succeeded

January 19, 2023 | Bona Law PC

Author: Steven Cernak

Recently, the Federal Trade Commission proposed a nearly complete ban on noncompete provisions in employment agreements. Because it faces the usual lengthy rulemaking process and several expected legal challenges, the proposed rule might not become effective for months, if ever. Through the proposal and attendant publicity, however, the FTC already has drastically changed how such provisions will be used.

Noncompete Basics and the Law Today

Noncompetes prevent workers from leaving an employer to work for other employers, typically competitors. The clauses usually are limited in time and geography. So, for example, a worker is prohibited from working for specific other employers — say, competitors — in a particular geographic area — say, Michigan — for a limited period of time — say, six months after leaving the first employer. Through these clauses, employers hope to better protect their secrets and avoid training a worker for a competitor. For example, a nondisclosure agreement might not adequately prevent use of the first employer’s competitive details that are embedded in the worker’s brain.

Today, such provisions are usually evaluated under state common or statutory law. A handful of states ban them. A few statutorily limit their use to high salary workers. Most try to balance the interests of the employer with those of the worker trying to earn a living in a chosen field. Such provisions are more likely to be upheld if the interests of the employer are legitimate and the restrictions on the worker’s mobility are limited.

FTC Proposed Rule

On January 5, 2023, the FTC proposed a rule that would upend that status quo developed over hundreds of years, declaring nearly all noncompetes as an “unfair method of competition” under the FTC Act, and outlawing nearly all of them. The proposal would allow some noncompetes in the sale of a business and sought comment on partially exempting noncompetes for high salary workers. The proposal would prohibit parties from entering new noncompete provisions and employers from enforcing existing ones. Also, all state laws that were not as restrictive would be pre-empted. The FTC is seeking comment on the proposal through March 10.

Reaction was quick. The proposal at regulations.gov generated thousands of official comments, mostly positive, in the first couple weeks. Negative commentary in the media took several angles. First, some renewed arguments that the FTC does not have the authority to issue rules under its “unfair methods of competition authority.” Others questioned whether the FTC has the authority under recent Supreme Court precedent to answer, without explicit Congressional direction, such a “major question” that has generated thousands of opinions and state laws over hundreds of years.

Finally, even granting that the FTC has the authority for such a rule, some argued that the FTC’s 200+ page notice did not adequately support the wisdom of departing from the typical case-by-case evaluation because other analyses found the overall effect of such noncompetes to be mixed. The FTC will need to consider all the official comments and decide if any tweaks to the proposed rule are appropriates. Unless the rule drastically changes, legal challenges seem certain. Therefore, a ban on nearly all noncompete provisions might not be effective for many months, if ever.

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California Rarely Enforces Non-Compete Clauses Against its Residents and Sometimes Won’t Even Enforce Out-of-State Forum Selection and Choice-of-Law Clauses

June 15, 2020 | Bona Law PC

Author: Luis Blanquez

California’s long-standing public policy in favor of employee mobility over an employer’s ability to prohibit any worker from going to work for a competitor is included in California Business & Professions Code Section 16600. So how do employers outside of California try to get around this powerful public policy?

First, employers in states where non-competes are still enforceable have attempted to implement choice-of-law clauses in employment agreements with California employees––requiring disputes between the parties to be governed not by California law, but rather by the law of a state more favorable to the enforcement of non-competes. But, as a general rule, California courts refuse to enforce such clauses. This is because California courts will not apply the law of another state where that law is “contrary to a fundamental public policy of the State of California.” In this case, the fundamental policy is open competition and employment mobility.

Conflict-of-law rules vary from state to state. Most states will not enforce a choice-of-law provision that violates the public policy of a state with a “materially greater interest” in the dispute or where the parties enjoy a “substantial relationship” with such state––i.e. where (i) the employee performs his/her work, (ii) the employee’s residence is, (iii) the contract was negotiated and formed, or (iv) the headquarters of the company is, among other factors.

Second, an employment agreement may also include a forum selection clause. In most cases it’s the employer––who sees one of its key employees leave to work for a competitor––who brings the case in the state court of the choice-of-law clause. When that happens, there is not much an employee can do, unless the case is moved to federal court and then transferred to another state. And even then, unless the case ends up in California federal court, the employee will have to rely on the courts of that other state to apply California choice-of-law principles to find the non-compete provision invalid.

To avoid such a hostile scenario, employees in California try to engage in what is called a “race to the courthouse.” They do so in the hope to effectively void their non-compete agreements under California law, before their former employers outside California enforce the non-compete agreement in a different state. This strategy sometimes works, but not always. For instance, the California Supreme Court has held that while California has a strong public policy against enforcing non-competition agreements, it’s not so strong as to warrant enjoining an employer from seeking relief in another state.

In any event, employers outside California have systematically struggled to enforce non-compete agreements in the past. And now it is even more complicated for them. For agreements entered into after January 1, 2017, California Labor Code Section 925 clarifies that employers may not require employees––who primarily work and reside in California––to agree to forum-selection and choice-of-law clauses that select non-California forums and/or laws, unless such employee is “individually represented by legal counsel in negotiating the terms of an agreement.”

RESTRICTIVE COVENANTS

Usually the way employers try to restrict their workers from going to work for a competitor is by including in the employment contract a so-called “restrictive covenant.”

A restrictive covenant is an agreement between an employer and employee that limits an employee’s ability to compete after leaving the employer. The most common and restrictive type of agreement is a non-compete agreement. It prohibits the employee from offering its services within the agreement’s geographic scope for a period of time after leaving the employer. Other types of restrictive covenants may also limit an employee’s ability to solicit the employer’s customers or employees for a period of time.

They are, unquestionably, restraints on trade. But are they unreasonable restraints on trade? In many states outside California that is the issue—if they are reasonable, a court will enforce them. And what does reasonable mean? Again, it depends. But typically, like other restraints on trade, they must usually be narrowly tailored to serve their purpose. They should contain “reasonable” limitations as to time, geographic area, and scope of activity. The laws, of course, vary from state to state. But as a practical matter, most judges are skeptical. Some courts will actually rewrite the agreements to make them reasonable.

Is My Restrictive Covenant Legal Under California Law?

In California, however, the law does not allow employers to enforce a restrictive covenant against their former employees, particularly when it takes the form of a non-compete agreement.

NON-COMPETE CLAUSES

These clauses usually have two primary purposes.

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Is My Restrictive Covenant Legal Under California Law?

September 20, 2019 | Bona Law PC

Author: Jarod Bona

It depends. But probably not. Outside of California, courts may enforce these non-compete agreements arising out of an employment contract. Of course, most courts, no matter what the law and state, view them skeptically. In California, however, the policy against these agreements is particularly strong.

A restrictive covenant is often part of an employment agreement that restricts the employee’s actions after leaving employment. They typically prohibit the employee from competing in particular markets for a period of time after leaving the employer, but may also keep the employee from soliciting the company’s customers or even employees after leaving.

They are, unquestionably, restraints on trade. But are they unreasonable restraints on trade? In many states that is the issue—if they are reasonable, a court will enforce them. What does reasonable mean? Again, it depends. But typically, like other restraints on trade, they must usually be narrowly tailored to serve their purpose. They should contain “reasonable” limitations as to time, geographic area, and scope of activity.

The laws, of course, vary from state to state. But as a practical matter, most judges are skeptical. Some courts will actually rewrite the agreements to make them reasonable.

The purpose of these restraints is to offer protection to an employer that must necessarily share trade secrets and sensitive customer or financial information with their employees. The concern is that this information is so sensitive and easily exploited by a competitor that the employer needs the restrictive covenant to keep an employee from leaving and benefiting from the information as a competitor. It also reduces the likelihood of free-riding on training.

Despite these benefits, California law and courts take a hard stand against certain restrictive covenants. The California Supreme Court in Edwards v. Arthur Anderson LLP explained, for example, that “judges assessing the validity of restrictive covenants should determine only whether the covenant restrains a party’s ability to compete and, if so, whether one of the statutory exceptions to Section 16600 applies.” (exceptions include the sale of goodwill or corporate stock of a business).

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