With a recent ruling from the California Supreme Court, companies across the nation are taking another look at their non-compete agreements with their employees. The Court upheld a 9th Circuit Court of Appeals decision in the case of Edwards v. Arthur Andersen, ruling that the non-compete agreement at the heart of the case—prohibiting Edwards from working for or soliciting Arthur Andersen clients for limited periods after his employment ended—was void. In its ruling, the Court emphasized California’s strong public policy favoring open competition and employee mobility, and determined that non-competition agreements are permissible only if they fit within one of the statutory exceptions of California Business and Professions Code Section 16600, which states: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Those exceptions relate to the sale or dissolution of corporations, partnerships and limited liability companies and as none were present in the Edwards case, the non-compete agreement was voided.
Now, if you think because you are headquartered in another state you are fine, think again. If you do business in California, have employees there, then this affects you directly. Moreover, this ruling sets a precedent that can be used in other courts wrestling with similar issues.
However, there are ways you can have your non-compete agreements with your employees and actually enforce them.
Forfeiture Clauses in Pensions and Top Hat Plans
This method is based on the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), which was designed to address a number of problems with unregulated employee benefit plans. ERISA provided greater workforce mobility by mandating minimum benefit vesting schedules for certain pension plans and by making the regulation of employee benefit and pension plans uniform through in all 50 states, preempting State law and that, oddly enough, is where its power over non-compete agreements comes in.
ERISA gives employers an alternative to State Courts to litigate and enforce non-compete agreements as long as they are contained within ERISA-covered benefit plans. Because ERISA plans are governed exclusively by federal law, state law prohibitions on non-competes do not apply, regardless of the employer’s, employee’s or transaction’s locale. This means that as long as the non-compete meets the minimum vesting requirements of the law, any employer contributions over and above those requirements can be tied to a post-employment promise not to compete and that if the employee does go ahead and competes, they forfeit all such employer contributions. So, the employee is always free to compete with the employer, but they cannot do so with their full pension.
ERISA Top Hat Plans . According to statute: Top Hat plans are "maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees." They are generally pension or deferred compensation plans usually offered to key executives. To qualify as a Top Hat plan under ERISA, funding for the plan must come solely from the general assets of the employer and plan eligibility must be restricted to a small percentage of the employees.
These plans are subject to some of the usual ERISA regulations, including the preemption of state law, but not to others, such as the strict vesting requirements. Because of this, non-compete forfeiture clauses can be more freely incorporated into top hat plans, and the effects of such clauses last much longer.
Forfeiture clauses are not the weapon in your non-compete arsenal. They provide a good basis, but there are three other things you can add:
Unfair Post-Employment Competition
Since employers already have legal remedies for unfair competition and trade secret misappropriation in most jurisdictions, they should include within their employment agreements clauses that specify that the employee will not to use or disclose trade secrets or confidential information, or otherwise unfairly compete with the employer. Doing so will also give them contractual remedies including attorneys’ fees or liquidated damages.
Choice of Law and Forum Selection
If an employer finds himself faced with local non-competition laws that favor employees, he can sometimes take advantage of more favorable jurisdictions by including a choice-of-law clause and a forum selection clause into their employment contracts. By incorporating both of these features, there is a better chance of obtaining judicial enforcement of the non-compete than would otherwise be the case since this combination often results in litigation being transferred to the more employer-friendly jurisdiction.
Employers seeking to protect themselves from former employees can also include "anti-raiding provisions" in their employment contracts. These provisions prohibit former employees from soliciting or encouraging current employees to quit and can effectively protect an employer’s workforce from being poached by competitors. What’s more, anti-raiding provisions may be indefinite in both scope and duration.
As an employer you want to protect yourself from unfair competition, ensure that your trade secrets remain secret and that your employees remain loyal to you and your company. By following these tips, with the advice your attorney and benefits professional, you can lay a contractual and fiscal groundwork to make sure your company remains as safe as possible from competition arising from former employees.