This year, we are monitoring several interesting and novel issues in the restrictive covenant context.
First, we expect to see litigation this year involving Massachusetts's Noncompetition Agreement Act, which went into effect on Oct. 1, 2018. This new law places several limits on the use of noncompetes in Massachusetts. Among other things, it limits noncompetes to a one-year duration, prohibits the use of noncompetes with respect to certain low-wage employees and is the first state law to require the payment of gardening leave compensation during a post-employment restriction period. On the heels of passage of this new law, we anticipate litigation challenging noncompetes entered into after October 2018 that do not comply with the requirements of the new law. We also anticipate litigation challenging noncompetes entered into prior to the effective date of the new law on the basis that noncompetes with terms conflicting with the requirements of the new law violate Massachusetts public policy, which is now codified in its Noncompetition Agreement Act.
Second, out in California, employers had assumed that California law distinguishes employee nonsolicitation agreements from noncompetition agreements and the former were enforceable. That assumption was based largely on a 1985 decision by the California Court of Appeal in Loral Corp. v. Moyes, 174 Cal. App. 3d 268, which enforced an agreement prohibiting a former company executive from soliciting the employees of his former employer to join his new venture. However, this assumption has been upended by recent decisions by the California Court of Appeal in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5th 923 (2018) and the United States District Court for the Northern District of California in Barker v. Insight Global, LLC, 2019 WL 176260 (Jan. 11, 2019) invalidating employee nonsolicitation agreements. Unless the California Supreme Court weighs in and rules differently than the courts have held in AMN Healthcare and Barker, California employers should consider eliminating their use of employee nonsolicitation agreements with their employees, as there is now a reasonable concern that such agreements will be found invalid in California.
Third, we expect to continue to see litigation and investigations involving "no-poach" agreements entered into between businesses, such as two franchisees who agree not to poach each other's employees. Although these cases do not arise in the traditional noncompete context involving an employee and employer, the issue has gained attention at both the federal and state levels. At the federal level, criminal antitrust charges have been brought against some businesses that have struck deals not to hire each other's workers. At the state level, state attorneys general have been investigating the hiring practices of several fast-food chains. Most recently, following an investigation spanning 14 states, Dunkin' Donuts, Arby's, Five Guys Burgers and Fries, and Little Caesars agreed to not enforce and no longer include no-poach provisions in their franchise agreements. Investigations are ongoing at other fast-food establishments. In addition, plaintiffs' lawyers are filing class action lawsuits against employers in the services and fast-food restaurant industries that have agreed not to hire each other's workers, alleging violations of federal antitrust laws.
Finally, at the federal level, we anticipate a continued spike in the number of lawsuits filed involving the Defend Trade Secrets Act, which was passed in May 2016. Additionally, in January of this year, Sen. Marco Rubio (R-Fla.) introduced the Freedom to Compete Act (S124), which would amend the Fair Labor Standards Act to prohibit the use of noncompete agreements against nonexempt employees. The bill was referred to the Committee on Health, Education, Labor and Pensions. This legislation is expected to garner more bipartisan support than the Workforce Mobility Act, which was proposed in April 2018 by Sens. Chris Murphy (D-Conn.) and Elizabeth Warren (D-Mass.) but not enacted. That legislation would have banned all noncompetes for all U.S. employers and employees engaged in commerce and also would have provided for a private right of action as well as civil fines and punitive damages. We will continue to monitor the Freedom to Compete Act.
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