Court Blocks FTC Noncompete Ban

 While this is not shocking, it is still big news - the Northern District of Texas struck down the FTC's proposed ban on noncompetes, which was to take effect on September 4, 2024. You can read the Court's Opinion and Order in Ryan LLC v. Federal Trade Commission here.

In short: "The Non-Compete Rule, 16 C.F.R. § 910.1–.6, is hereby SET ASIDE and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter." The Court held that "the FTC lacks statutory authority to promulgate the NonCompete Rule, and that the Rule is arbitrary and capricious."

What now? Well, for now noncompetes remain as enforceable as they were before the FTC rule, and employers can hold off on sending those notices of unenforceability to employees with noncompetes. We will likely see an appeal from the FTC. It is possible (but in my opinion unlikely) that an appellate court will take swift action to reinstate the rule. Longer term, there will be some appellate action and other pending litigation playing out. Yes, the ol' "stay tuned." 

Overtime and Noncompete Regulations to Plan for in 2024

What better way to kick off the new year than with my latest article in Pennsylvania Business Central? The article addresses Overtime and Noncompete Regulations to Plan for in 2024. Will they actually take effect? We don't know yet. But, employers should start planning just in case.

What does "solicit" mean in nonsolicitation agreements?

Nonsolicitation clauses are fairly common in restrictive covenants. The contract will say something like, "Upon termination, Employee shall not solicit customers of Employer for a period of two years" (it is also common to forbid solicitation of employees). What exactly does "solicit" mean though?

Meyer-Chatfield v. Century Business Srv., Inc., 732 F.Supp.2d 514 (E.D. Pa. 2010) has an entire section under the headline "Meaning of Solicitation." The Court turns to Black's Law Dictionary:

To appeal for something; to apply to for obtaining something; to ask earnestly; to ask for the purpose of receiving; to endeavor to obtain by asking or pleading; to entreat, implore, or importune; to make petition to; to plead for; to try to obtain; and though the word implies a serious request, it requires no particular degree of importunity, entreaty, imploration, or supplication. To awake or incite to action by acts or conduct intended to and calculated to incite the act of giving. The term implies personal petition and importunity addressed to a particular individual to do some particular thing. Black's Law Dictionary, p. 1392 (6th ed. 1990).

At this point, I should note that Black's Law Dictionary has undergone numerous revisions since the 6th Ed. in 1990. The 10th edition (2014) defines "solicitation" as:

1. The act or an instance of requesting or seeking to obtain something; a request or petition . . . .
4. An attempt or effort to gain business. • The Model Rules of Professional Conduct place certain prohibitions on lawyers' direct solicitation of potential clients.

I omitted the less relevant prostitute-y/criminal definitions.

I found this portion of the Meyer-Chatfield opinion particularly interesting:

Also relevant here is Aetna Bldg. Maintenance Co. v. West, 246 P.2d 11 (Cal. 1952). Aetna concerned an agreement where the defendant may not "solicit, serve and/or cater to any of the customers of the [plaintiff] Company served by him." Id. at 13. Despite the additional language of "serve and/or cater" modifying solicit, the court still held that "[m]erely informing customers of one's former employer of a change of employment, without more, is not solicitation. Neither does the willingness to discuss business upon invitation of another party constitute solicitation on the part of the invitee."

That gives employees who sign nonsolicitation agreements a lot of wiggle room.

Casino or Employee? Who Owns the Book of Elite Players?

The Baltimore Sun has an interesting story on an "alleged high-roller theft case." A casino host resigned from her job and took a new job . . . with a competing casino. 

While she was at the first casino, she accumulated a list of "elite players" as part of her job. When she went to the new casino, she contacted those high stakes players to try to get them to come to the new casino. The first casino is not happy about it.

So, what can employers like the first casino do to protect themselves from things like this? Well, the obvious answer is to put a restriction in writing. According to the article, the employer did present the employee with a noncompete. But, she said she didn't like getting "harassed" to sign it, so she quit. 

Ideally, the employer should have made the noncompete a condition of starting the job. The employee claims she built her book of business on the job - something she could not have done if the casino had simply refused to let her work without first signing the agreement. The noncompete could also include nonsolicitation provisions, and identify the customer list as confidential proprietary information. 

Now, the parties are stuck battling it out in court.

HT: Mike Chittenden (an employee benefits attorney with Miller and Chevalier) via email.

Case Summary: Missett v. Hub International Pennsylvania, LLC

The latest Pennsylvania Bar Association Civil Litigation Update is out and it includes my case summary of Missett v. Hub International Pennsylvania, LLC: LLC that Acquires Membership Interests from Contracting LLC Has Standing to Enforce Restrictive Covenant Against Terminated Employee.

Catchy title, huh? Lawffice Space readers may recall that I covered this case extensively when it first came out:

• Non-Solicitation Agreements when Employers "Change Hands"
• Non-Solicitation Agreement Enforceable After Firing
• Non-Solicitation Agreements: Factors to Consider - COTW #11

If you're interested in a formal summary, however, just check out the case summary linked above.

Sidenote: I wrote the blog entries before knowing I would write the case summary and was assigned the case summary by someone who I am quite certain was unaware of the blog entries. I believe it was just a happy coincidence!

See also: My case summary of In re Bridgeport Fire Litigation in the same issue: Individual Class Members Have Standing to Move for Judge’s Recusal, and Recusal Motion Must Be Decided Prior to Issuing Substantive Orders. My McQuaide Blasko colleague, Jon Stepanian of Defense of Medicine fame, also has some summaries in there.

Posted by Philip Miles, an attorney with McQuaide Blasko in State College, Pennsylvania in the firm's civil litigation and labor and employment law practice groups.

Non-Solicitation Agreements: Factors to Consider - COTW #11

I've only written about one case all week, what did you think would be the Case of the Week!? It's Missett v. Hub Int'l Pennsylvania, LLC, 2010 PA Super 178, 2010 WL 3704984 (Pa. Super. Ct. Sept. 23, 2010). You may say it's a cop out, but I have four depositions today so cop that (how's that for customer appreciation?)! In all seriousness, I've left an extremely important aspect of Missett for today's post: The factors to consider when determining the enforceability of a restrictive covenant, here a nonsolicitation agreement.

First, a brief recap:

• The employer-LLC's sale of its membership interests does not defeat the enforceability of the covenant.
• The employee's termination is a factor but not sufficient in itself to render the covenant unenforceable.

So, if the above two considerations were insufficient to render the covenant unenforceable, what else should the trial court have considered? First, the legal standard:

In Pennsylvania, restrictive covenants are enforceable if:
(1) they are incident to an employment relationship between the parties;
(2) the restrictions imposed by the covenant are reasonably necessary for the protection of the employer; and
(3) the restrictions imposed are reasonably limited in duration and geographic extent.

Citing All-Pak, Inc. v. Johnston, 694 A.2d 347, 350 (Pa.Super.1997).

The Court provided a helpful rundown of some practical considerations in assessing the reasonableness of the covenant:

• "[P]ossible adverse effects on [the Employer] that could result from [the Employee's] use of [confidential and proprietary] information on behalf of a competitor;"
  
• The reasonableness of the two-year duration of the non-solicitation period;
  
• The Employee repeatedly signing similar agreements with the Employer; and consideration provided by the Employer;
  
• "[P]ossible negative effects the restrictive covenant may have on [the Employee's] ability to earn a living and support his family;"
  
• "Is the pool of potential customers so small that [the Employee] would have difficulty developing a book of business on his own?"
  
• "Are these types of restrictive post-employment agreements standard and customary in the insurance industry?"
  

That's a pretty nice list the Court put together for us! But even with this extensive rundown, the Court still instructed the trial court to consider the factors above, "as well as any others that may be relevant to a determination as to whether the non-solicitation clause is reasonable and enforceable."

Sadly, Lawffice Space Non-solicitation Week is over now, but I'll be back next week with some posts on ADAAA developments and more.

Posted by Philip Miles, an employment lawyer with McQuaide Blasko in State College, Pennsylvania.

Non-Solicitation Agreement Enforceable After Firing - Missett II

Non-solicitation week continues on Lawffice Space! We're still focusing on Missett v. Hub Int'l Pennsylvania, LLC, 2010 PA Super 178, 2010 WL 3704984 (Pa. Super. Ct. Sept. 23, 2010). For clarification purposes "Missett II" above reflects that this is Part II of my series on the case, not a separate ruling in Missett.

Yesterday, we discovered that a non-solicitation agreement is enforceable even after the sale of the outstanding membership interests in the LLC with whom the employee entered into the agreement.  Thus, in Missett, the employer had standing to enforce the covenant even after the sale. But the trial court still wouldn't enforce it. Why?

The trial court found that the employee "was fired to protect [the employer's] bottom line ... not for poor performance." And this alone was reason not to enforce the covenant. The Court relied primarily on Insulation Corp. of America v. Brobston, 667 A.2d 729, 733 (Pa.Super.1995) which noted that the employer's "need to protect itself from the former employee is diminished by the fact that the employee's worth to the corporation is presumably insignificant." In that case, the employee was "terminated by his employer on the grounds that he ha[d] failed to promote the employer's legitimate business interests."

In Missett, the Court reversed the trial court's decision. It acknowledged the importance of the previous rulings on the issue but said the firing is "but one 'important factor to consider in assessing both the employer's protective interests and the employee's ability to earn a living.'" (Quoting from Brobston itself). The firing alone was insufficient to render the covenant unenforceable.

This logically leads us to the next question (and the subject of tomorrow's post): What are the other factors the trial court should have considered?

Posted by Philip Miles, an employment lawyer with McQuaide Blasko in State College, Pennsylvania.

Non-Solicitation Agreements when Employers "Change Hands" - Missett I

This post kicks off non-solicitation agreement week here on Lawffice Space! It's really just one Pennsylvania Superior Court case, but it sheds light on a couple of important issues so it will be multiple posts. The case is Missett v. Hub Int'l Pennsylvania, LLC, 2010 PA Super 178, 2010 WL 3704984 (Pa. Super. Ct. Sept. 23, 2010).

Today's issue: Is a non-solicitation agreement enforceable when an employer changes hands. What do I mean by "changes hands?" Well, in Missett, the employee worked for an LLC under a non-solicitation agreement (there's some complicated background, but this is the basic gist). Then, a corporation:

entered into a Purchase and Sale Agreement with [the LLC], pursuant to which it acquired all of the issued and outstanding membership equity interests in [the LLC].

Assuming the non-solicitation agreement was enforceable before the acquisition, is it still enforceable after?

The Court gave a convenient rundown of how Pennsylvania courts have handled similar situations:

• In Hess v. Gebhard & Co., Inc., 808 A .2d 912 (Pa.2002), the Court held that “a restrictive covenant not to compete, contained in an employment agreement, is not assignable to the purchasing business entity, in the absence of a specific assignability provision, where the covenant is included in a sale of assets.” Essentially, "an asset purchase results in an entirely new employer/employee relationship."

• In J.C. Ehrlich Co., Inc. v. Martin, 979 A.2d 862 (Pa.Super.2009), the Court held that a covenant not to compete remained enforceable following the consolidation of two companies through a stock purchase agreement. Essentially, the "employer remained the same." (There were also some similar federal cases in the Third Circuit).

• Back to Missett, the Court "conclude[d] that the sale... of the outstanding membership interests in [the LLC] and the subsequent name change was not a sale of assets and, thus, did not result in a change in the identity of Missett's employer."

In short, when an employer "changes hands" (that's the best catch-all phrase I could come up with), the form of the transaction matters.  Missett helps us by providing a rundown of previous decisions involving sales of assets, and stock purchase agreements. It also adds LLC sale of memebrship interests to the string of case law.

Next post, I'll get into the enforceability of the agreement after the employee gets terminated, now that we've established that the LLC membership sale does not render the agreement unenforceable.

Posted by Philip Miles, an employment lawyer with McQuaide Blasko in State College, Pennsylvania.