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Noncompete bans put employers on notice

Posted On: Dec. 1, 2023 12:00 AM CST


Two California noncompete laws that take effect in 2024 reinforce the state’s position as the most aggressive in discouraging noncompete agreements, presenting employers with enforcement challenges.

Experts say the California measures reflect a national trend that is underway in many states to discourage noncompetes, as well as federal initiatives, including a proposed Federal Trade Commission regulation.

Experts recommend that employers begin preparing for the laws, particularly because one of them requires employers to quickly notify California employees that any noncompete agreements they have signed may be void.

Noncompetes are a significant issue in any industry where there is competition for top talent, including financial services, health care and construction, said Jeanne Fugate, a partner with King & Spalding LLP in Los Angeles.

The issue frequently arises in poaching litigation among insurance brokers, who are often required to sign nonsolicitation agreements (see related story below).

Noncompete provisions vary by state, with some, for instance, prohibiting their use for employees who earn below a certain threshold.

When it issued its noncompete proposal in January, the FTC said an estimated 30 million workers, or 18% of the U.S. workforce, were covered by noncompetes. 

In addition to the FTC regulation, in May, the National Labor Relations Board’s general counsel issued a memo that said noncompetes violate the National Labor Relations Act because they deter employees from exercising their rights to act concertedly.

Danielle Ochs, a shareholder with Ogletree Deakins in San Francisco, said, “The enforceability of restrictive covenants is getting more narrow across the country.” 

The California laws set to take effect Jan. 1, 2024, “give teeth” to earlier laws by providing a right of private action and addressing areas that have lacked clarity, she said.

Senate Bill 699, signed into law by Gov. Gavin Newsom on Sept. 1, prohibits noncompetes with California employees regardless of the state in which they were signed or where the employee worked, and creates a private right of action.

“Once an employee steps into California, it seems to subject them to California law,” said Bennett Pine, a shareholder with Anderson Kill P.C. in New York.

Assembly Bill 1076, signed into law Oct. 13, codifies existing case law on noncompetes. It also requires employers, by Feb. 14, 2024, to inform current and former employees who were employed after Jan. 1, 2022, and are subject to noncompetes that the agreements are void.

Both have created employer concerns. 

“A lot of states” will interpret noncompetes consistently with their own law “and not care what California has to say about it,” said Katherine V.A. Smith, a partner with Gibson, Dunn & Crutcher LLP in Los Angeles. “I’m sure we’re going to see a lot of challenges to this law as being overreaching,” she said.

Walter C. Pfeffer, a shareholder with Littler Mendelson P.C. in San Francisco, said employers will have to spend a lot of time on a “complicated risk analysis that’s going to cause a lot of confusion.” 

Another concern is AB 1076’s Feb. 14, 2024, notice provision, which requires employers to send individualized notices to individuals’ last known home and email addresses.

It provides a “pretty short time frame” and is “somewhat onerous,” said Dan M. Forman, Los Angeles office managing partner and chair of CDF Labor Law’s trade secret practice group and its privacy practice group.

The failure to give notice will be “deemed by the statute to be an act of unfair competition that may provide fodder for litigation against the employer,” said Mark E. Terman, a partner with Faegre Drinker Biddle & Reath LLP in Los Angeles.

Experts say employers should review their agreements immediately, assess their exposure and get advice as to how to proceed, as well as conduct a risk analysis to determine what to do in terms of amending contracts and issuing notices. 

They should also remind current and former employees about their obligations to not use or disclose trade secrets pursuant to the agreements they signed and that their work product remains company property, Mr. Terman said. 

Employers should close the letter “with something to the effect that, ‘We’re counting on you to live up to your obligations to protect our trade secrets from unauthorized use,’” he said. 

Broker poaching litigation 

Several poaching cases involving insurance brokers were in various stages of progress last month. 

  • Plaintiffs and defendants sought expedited discovery in November in U.S. District Court in Richmond, Virginia, in Willis Towers Watson Southeast Inc. et. al v. Alliant Insurance Services Inc. et al. The case, filed in October, involves a just-retired WTW official who allegedly encouraged seven other employees he supervised to join him at Alliant.
  • Defendants in litigation filed by AssuredPartners of South Carolina LLC against Alliant and five former brokers objected to a temporary restraining order issued earlier in the month by a federal district court in Columbia, South Carolina, stating it was overly broad. The case is AssuredPartners of South Carolina LLC et. al v. Alliant Insurance Services.
  • Lockton Cos. LLC sued three former producers who allegedly resigned and immediately joined Alliant, seeking an injunction prohibiting them from joining Alliant or another competitor before their 30-day notice requirement elapsed. The case, filed in October in U.S. District Court in Kansas City, Missouri is Lockton Cos. LLC Pacific Series and Lockton Partners LLC v. Gregory D. Barnes, Mark Racunas and Richard A. Roderick
  • Seven former Lockton Cos. LLC brokers who were based in California and began working for Alliant in October, sued their former employer in state court in two separate cases seeking to void their noncompete agreements. The cases, Jeffrey Mazie et al. v. Lockton Cos. LLC and John Byun et al. v. Lockton Cos. LLC., were transferred in November to U.S. District Court in Los Angeles.