restrictive covenants

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On January 29, 2024, the Delaware Supreme Court issued an important decision addressing the enforceability of restrictive covenants. As detailed below, in Cantor Fitzgerald v. Ainslie, the court upheld forfeiture-for-competition provisions set forth in a limited partnership (LP) agreement and ruled in favor of the partnership not having to pay out millions to former partners.

Key highlights

In Cantor Fitzgerald, the Delaware Supreme Court decision relied significantly on the following factors in enforcing the LP agreement as written and determining that the disputed provisions were, in fact, enforceable:

  • The restrictive covenant did not bar the claimants from engaging in competitive activities.
  • Rather, the provisions in question provided, in part, that receipt and retention of prior conditional awards of a portion of their compensation would be subject to the condition precedent that the recipient refrained from competing – in other words, these were forfeiture-for-competition provisions.
  • These forfeiture-for-competition provisions were not liquidated damages provisions (triggered by a breach of contract); rather, these provisions set up a condition precedent (not competing with the employer) to the employees’ receipt of the amounts that had been held back. 
  • The “employee choice doctrine” suggests that courts do not review forfeiture-for-competition provisions for reasonableness where, as here, the employee voluntarily terminates employment (as opposed to remaining employed and vesting in the contingent compensation amounts).

Continue Reading Delaware Supreme Court confirms enforceability of restrictive covenant provisions in favor of employer-partnership, reversing Chancery Court determination

On July 9, 2021, the Biden Administration issued a sweeping Executive Order called Promoting Competition in the American Economy (Order). Although it does not immediately change the current legal landscape governing non-compete agreements (or any other aspects of U.S. antitrust enforcement), the Order encourages the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility”. In the wake of the Order and other calls for more rigorous enforcement of employee non-compete and similar restrictive covenants, many within the business community wonder if a federal crackdown on non-compete agreements is coming. We address this issue below, and discuss steps employers may want to consider in light of the potential changes ahead.

Brief summary

According to the Fact Sheet accompanying the Order, roughly half of private-sector businesses require at least some employees to sign post-employment non-compete agreements, affecting an estimated 36 to 60 million workers. On multiple occasions over the past decade-plus, there have been calls for federal agencies to investigate and curtail the use of such agreements. President Biden’s Order is the most recent, and potentially significant, development in this area. He had vowed during his campaign to “eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets.” The Order is a further step towards fulfilling his campaign promise.

According to the White House, the Order “includes 72 initiatives by more than a dozen federal agencies to promptly tackle some of the most pressing competition problems across our economy.” One provision in the Order takes direct aim at non-competes:

. . . the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.

The language in the Order is not as strident as the wording in the Fact Sheet (which encourages the FTC to “ban or limit” non-compete agreements). But it certainly is expansive, targeting any “other clauses or agreements that may unfairly limit worker mobility.” We do not know if the FTC will follow the President’s lead and issue regulations addressing non-compete and similar agreements. But, at a minimum, we anticipate that employee non-compete, non-solicitation, no-rehire, and similar restrictive covenants will receive closer scrutiny by the Biden Administration, and that stricter enforcement of such agreements is very possible.
Continue Reading What’s all this talk about federal regulation of non-compete agreements?

As we previously reported on April 23, 2020, in the midst of the COVID-19 pandemic that is dominating the news, Virginia Governor Ralph Northam signed into law a slew of bills passed by the General Assembly that transform Virginia’s employment laws. This is the second part of a series of alerts discussing Virginia’s groundbreaking new laws governing workplace discrimination and retaliation, worker misclassification, wages, restrictive covenants, background checks and whistleblower claims [Part 1 is here].

Employers will be subject to substantial liability for misclassification of employees

On March 10 and March 18, 2020, respectively, Governor Northam signed into law H.B. 984 and S.B. 894, which create a private right of action against employers for misclassifying employees as independent contractors. The new law, set to take effect July 1, 2020, will expose employers who misclassify employees as independent contractors to substantial liability, as employees bringing such actions may recover damages for lost wages/salary (including overtime worked, but not paid), employment benefits, or other lost compensation, as well as reasonable attorney’s fees and costs. Most notably, employers will face an uphill battle in defending these claims because the law creates a general presumption that an individual is an employee unless the employer can establish independent contractor status based on Internal Revenue Service guidelines.
Continue Reading Virginia adopts a wave of new employment laws. Part 2 – Worker classification and clampdown on restrictive covenants

The Texas Citizens Participation Act, Tex. Civ. Prac. & Rem. Code §§ 27.001 et seq. (the TCPA), Texas’ anti-SLAPP statute, is likely to receive a much needed overhaul after the Texas Senate unanimously passed H.B. 2730 on May 17, 2019. If the Texas governor signs it into law, as expected based on the bill’s broad bipartisan support in the Texas House and Senate, the revisions will take effect on September 1, 2019, and will clarify – and significantly narrow – the types of claims to which the TCPA applies. Also, importantly for companies seeking to protect their trade secrets and enforce their restrictive covenants, the changes to the TCPA would exempt such claims from its purview.

The TCPA was originally enacted in 2011 to protect citizens who exercise their First Amendment rights from retaliatory legal actions that seek to intimidate or silence them. Specifically, the TCPA allows a party to file a motion to dismiss within 60 days of service of a lawsuit if it can establish that the legal action is based on, relates to, or is in response to the party’s exercise of the right of free speech, the right to petition, or the right of association. If the party-defendant meets this burden, the plaintiff must then establish “by clear and specific evidence a prima facie case for each essential element of the claim in question.” If the defendant is ultimately successful on its motion to dismiss, the defendant is entitled to recover its attorneys’ fees.

Importantly, while a TCPA motion to dismiss is pending – and during any subsequent appeal of the trial court’s ruling on the motion – discovery and all other proceedings at the trial court are stayed. This stay can result in significant delay, which can be particularly harmful in cases in which an employer seeks emergency injunctive relief to prevent the irreparable harm associated with the use and disclosure of misappropriated trade secrets or the violation of restrictive covenants by former employees.Continue Reading Texas Legislature takes aim at Anti-SLAPP challenges

Starting January 1, 2017, the new Illinois Freedom to Work Act will prohibit private sector employers from entering into covenants not-to-compete with “low-wage employees” who work in the state, and render unenforceable any such restrictions that are entered into on or after that date.

The Act defines a “low-wage employee” as one who earns the greater of $13.00 per hour or the minimum wage required by applicable federal, state, or local law. As of January 1, 2017, that would include any private sector employee in Illinois who is paid $13.00 per hour or less.

The Act defines a “covenant not to compete” as an agreement between an employer and a low-wage employee entered into on or after January 1, 2017, that restricts the employee from performing any work for another employer for a specified period of time, any work in a specified geographical area, or work for another employer that is similar to the employee’s work for the employer that is a party to the agreement. The Act thus appears limited to non-competes rather than barring covenants not to solicit customers or employees, or confidentiality agreements.
Continue Reading Illinois Bans Noncompetes for Low-Wage Employees