Quirky Question # 188:
Like many companies, we are in a highly competitive industry. We spend a lot of time training our sales employees to perform their jobs, at a considerable expense to our company. Consequently, we have all of our sales personnel execute a non-compete/non-solicitation agreement at the commencement of their employment.
Several of our employees have joined a company that we recognize is not competitive with ours. But, it sure seems like they are recruiting our other sales people to join them. A number of employees who have been friends for some time have jointly moved to this other company.
Do we have a legitimate claim based on the restrictions contained in the non-solicitation agreement? We have to stop the bleeding. This is especially true right now because our own company has been struggling (layoffs, declining stock price, etc.), so it probably isn’t too difficult to convince our employees that they might have a better future elsewhere. Anything we can do?
Maybe. Maybe not. Sorry for the equivocal response but we’d need more facts to provide you clear guidance. Let’s review a few basics of restrictive covenant law, which we hope will provide you some insights to assist you in analyzing this issue.
First, as you likely know, the law of post-employment restrictive covenants, such as a non-compete or a non-solicit, is dependent on state law. The enforceability of your employment agreements will be heavily influenced by the governing state law. Some states (e.g., California and North Dakota) repudiate restrictive covenants except in extremely limited circumstances. Other states enforce the agreements made by the employer and employee, despite the employees’ lack of bargaining power when the agreement is executed. Some states (approximately 17) have statutes that regulate this area. So, the first task is to determine what state’s law applies.
Second, as a corollary to the preceding point, the governing state law may be determined by the contract, assuming there is a choice-of-law provision in the agreement. But, even when there is a choice-of-law provision, some courts may not elect to enforce it. For example, if the employee lives and works in a state different from the “governing law” state specified in the contract, and if the court concludes that the public policies of the state where the employee works are inconsistent with the state identified in the choice-of-law provision, the court may choose not to enforce the contract provision. Of course, in the absence of any choice-of-law contractual provision, and in a context where the competing states have divergent legal standards, the determination of which state’s law will govern the contract’s interpretation will turn on a number of variables, including, for example: predictability of results; maintenance of interstate order; simplification of the judicial task, advancement of the forum state’s governmental interest; and application of the better rule of law.
Third, equally, if not more important than the determination of which state’s law governs the contract interpretation, is the language of the contract itself. You have pointed out your company requires your sales employees to execute a “non-solicitation agreement.” But, you have not described the language of that agreement. Whether your company has any chance of enforcing the agreement will depend heavily on its language. This can be broken down further into a few Goldilocks-like subparts.
Language Too Narrow: Some “non-solicitation” agreements are limited only to what the name of the restriction implies – soliciting. At times, companies will use a few synonyms for soliciting, such as prohibitions on “inducing,” “convincing,” or “persuading” the ex-employees’ former colleagues to resign their employment, or to join the ex-employees’ new employer. When this type of language is used, courts may elect to enforce the language literally, concluding that the employer chose to use language prohibiting only specific affirmative actions by the outgoing employee. Thus, if the former employee did not initiate the contact (i.e., did not affirmatively reach out to his/her former colleagues), the ensuing interaction between the parties was not proscribed by the employment agreement.
Language Too Broad: In contrast to the prior example, some “non-solicitation” agreements use language that is overbroad, sometimes ridiculously so. For example, some non-solicits list every imaginable type of interaction between the ex-employee and his/her former colleagues, regardless of whether proscription is linked to a legitimate interest of the employer. In these situations, the employer seemingly is prohibiting any interaction, even social interaction between two individuals who may have been friends for a protracted period. This type of language will provide the former employee with some persuasive arguments to challenge the validity of the agreement.
Another example of overbroad non-solicit language is when the employer includes broad prohibitions on activities “related” to soliciting, often prefaced by a “directly or indirectly” descriptor. Here, an employer might use language stating that a departed employee may not “assist in hiring” anyone who is a current employee. What does that mean? If the departed employee advised a former colleague to check out his new employer’s website, has he/she “assisted”? If the former employee advised a former colleague to get a resume in quickly, has he/she assisted? If the ex-employee provided a former colleague with some background insights into the new company, has he/she assisted? If the former employee provided the former colleague with insights into the individuals likely to conduct the interview of the applicant, has he/she assisted? In each of these hypothetical contexts, the so-called non-solicit seemingly encompasses conduct that is utterly innocuous and that an employer would have difficulty linking to a legitimate corporate interest.
Moreover, the problem is complicated when the ex-employee is in a managerial role in the new company, especially a senior role. Is that individual precluded from interviewing a former colleague? From offering an opinion on the applicant’s skill sets? From expressing enthusiasm about the applicant’s personal integrity or other characteristics? What if the applicant considers it important to meet with the individual who is likely to be his/her boss; in other words, interview the interviewer to determine whether this is a company he/she would like to join? Is this type of interaction prohibited?
When the language of the non-solicit is overbroad, for the reasons above or other reasons, another state-law- dependent issue comes into play. Some states do not permit equitable modification of the restrictive covenant. Other states allow courts limited flexibility to modify the contract language (the blue-pencil doctrine), but only if the modification can be achieved by striking offending verbiage without adding or creating other contract language. Still other states simply prohibit any judicial modification of inartfully crafted restrictive covenants, whether non-solicits or non-competes.
Language Just Right: It is possible to draft a non-solicit that passes legal muster (in states where restrictive covenants are not proscribed). In my view, however, there is not a one-size-fits-all approach. The language used must be linked to a legitimate corporate interest that can be easily articulated. This will depend on a host of factors, including the nature of the business, the position occupied by the restricted employee, the time and expense associated with training the employee (and/or his/her replacement), the employee’s access to confidential and proprietary data, and other considerations. Moreover, once appropriate language is drafted, the non-solicit still has to withstand the scrutiny to which any other restrictive covenant is subjected (adequacy of consideration, reasonable in terms of substantive restriction, geographic restriction and temporal restriction).
To summarize some of the key issues for you to explore:
- What state’s law governs?
- Does your contract contain a choice of law provision?
- Is there a conflict between the law of the state where the employee lives and works and the law specified in the contract?
- What is the specific contract language — what conduct is prohibited?
- Is the prohibited language linked to a legitimate interest of your company?
- If the language suffers from being overbroad, what flexibility do the courts in your state have to modify employment agreements?
In addition to these backdrop considerations, there are a few other issues worthy of consideration. One important factor you’ve identified is that your company has been struggling; you referenced the fact that your firm has experienced layoffs, and that the company’s stock price has declined. This raises the question of whether your ex-employees whom you suspect of soliciting your current employees resigned voluntarily or were laid off. While this may not be a dispositive factor in terms of how a court might interpret the non-solicit, it does bear upon the general equities and provide the atmospherics for the court’s analysis. Moreover, this issue highlights another aspect of the contract language. Some restrictive covenants specify that they apply regardless of the reason for the employee’s separation. Other restrictive covenants only apply when the employee resigns voluntarily.
Similarly, are the employees being solicited in jeopardy of losing their positions? Are they on a lay-off list? Might their departments be eliminated? Are any of them on performance improvement plans? Here, too, these background inquiries create atmospherics that could affect a court’s analysis.
Regardless of whether the employees you suspect of soliciting your employees left voluntarily or involuntarily, as you realize, it makes it much easier to persuade someone to leave your employ when a company is struggling. When employees are insecure about their future, when their friends are being laid off, when the opportunities for promotion appear bleak, when wages are flat or declining, the likelihood that employees might depart increases dramatically. When the alternative appears attractive, either by itself, or in comparison to the problems at your own company, the incentives for departure are increased.
Another observation you made in your question is that the employees who first left your company are friends with those who were recruited away. In some ways, this variable has the potential to complicate the argument that some inappropriate or wrongful conduct has occurred, simply because the individuals may have been interacting regularly. Courts recognize that co-workers, especially those with personal friendships, talk to each other. Invariably, topics of conversation include job satisfaction, future employment opportunities, compensation levels, and a host of other job-related subjects. Defining what is a permissible or impermissible subject of discussion in this context is difficult.
Finally, you note that your company and the organization your ex-employees have joined are not competitive. As a result, your non-compete restriction does not come into play. Many courts are loath to convert a “non-solicit” into a de facto “non-compete,” another problem you will have to overcome.
The bottom line is that non-solicitation agreements can be useful post-employment restrictive covenants that help protect a corporation against losing quality employees. Unfortunately, without more data, we cannot provide much insight into the validity or enforceability of the agreements your company is utilizing.
In general, non-solicitation agreements have to be carefully crafted and tailored to protecting the legitimate interests of the company. Far more effective than creating contractual obligations binding employees to a company, however, is creating a corporate environment that employees do not want to leave. As Jim Goodnight, the CEO of SAS, one of the country’s most successful software companies observed in a 2003 “60-Minutes” piece, “You know, I guess that 95 percent of my assets drive out the front gate every evening. It’s my job to bring them back.”
SAS has been extraordinarily successful in achieving its CEO’s vision (the company is often selected as the best company to work for in the U.S.). The ties that bind its employees to the company are not contractual in nature; they are grounded on more meaningful connections between employer and employee. Solve the problems that are confronting your company and we suspect the “bleeding” you referenced will diminish dramatically, if not stop altogether. Your goal should be to make your non-solicitation agreement irrelevant.
We have a highly mobile workforce, and we are concerned about our former employees going to work for a competitor, stealing our customers, and raiding our employees. We are a technology based company and have developed proprietary information that would give our competitors an edge if our former employees were to use or disclose it to them. We are based in California and understand that it has a very narrow view of non-competition agreements. It seems very unfair. If we put provisions into our contracts to try to stop this from happening, what are the chances that the contract will be enforceable?
If you have any particularly unusual questions pertaining to California law, you can send them either to Karen or me.]
The Court of Appeal and the Supreme Court both disagreed. Citing the express language of Section 16600, the Supreme Court rejected any “rule of reasonableness” or “narrow-restraint” exception that would uphold a non-competition agreement so long as it did not completely preclude the employee from engaging in a lawful profession, trade or business. The court concluded, “Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect.” The only exceptions are those set forth in the statute itself that allow non-competes in the context of a sale or dissolution of a corporation, partnership, or limited liability corporation where the individual granting the non-compete has an equity interest in the business being sold (e.g., a shareholder or a partner).
Quirky Question # 54:
We have an employee who has missed a fair amount of work due to various surgeries. As set forth in our handbook, we offer FMLA leave for employees who have worked 1250 hours in the preceding 12 months. When we were informed that our employee would need to miss additional time due to some follow-up surgeries, we belatedly explored the issue with our attorneys.
Our lawyers advised us that although our employee had worked the requisite number of hours under the FMLA, he was not FMLA eligible because we don’t have enough employees in the office where he works or within 75 miles of his worksite. Based on those facts, we informed our employee that he was not eligible for FMLA leave and told him that he could not take time off. When he went forward with his surgery and took leave anyway, we terminated his employment. He now has sued us under the FMLA and other legal theories, including “promissory estoppel.” Given that he was not FMLA eligible, do we have anything to worry about?
As you may have perceived, QQ # 54 was derived from a 7th Circuit case, decided just last month, Peters v. Gilead Sciences, Inc., No. 06-4290 (July 14, 2008). In Peters, a case based on Indiana law, the employer had provided its employees with an employee handbook which paraphrased the language of the Family and Medical Leave Act (FMLA). The handbook described the FMLA eligibility requirements of 1250 hours of work in the preceding 12 months, combined with one year’s employment. The employer’s handbook, however, did not address the other nuances of the FMLA or its other applicability criteria. For example, the handbook did not address the FMLA requirement that there must be 50 employees at the worksite of the employee seeking FMLA leave, or within 75 miles of that worksite (sometimes referenced as the 50/75 rule).
Peters experienced a work-related neck and shoulder injury in late 2001. He re-injured his shoulder about one year later, leading to corrective surgery that required a brief (11-day) leave. Compounding the imprecision of its handbook, Gilead Sciences then sent Peters a letter explaining the FMLA and restating, in part, the FMLA’s eligibility requirements. Again, however, the letter omitted any reference to the 50/75 rule. The letter specified when Peters would need to return to work, and promised him reinstatement in the same or an equivalent position.
As noted above, Peters quickly returned to work and was reinstated into his job. Several months later, however, he took a second leave, caused by an adverse reaction to a prescription medication he had been using. The company sent Peters another letter, largely mirroring its first FMLA communication and specifying the date by which he needed to return to work. Somewhat carelessly, the company miscalculated the mandatory return date, miscounting the amount of leave Peters actually had taken and consequently, underestimating the amount of leave he had left.
When the incorrectly calculated leave “expired,” the company hired a new employee to fill Peters’ job. The company explained its decision to Peters by referencing another FMLA provision, the company’s right to replace an employee occupying a “key” position. Gilead Sciences offered Peters another position but he rejected it, at which point he was terminated. Peters then sued the company on a number of different legal theories, including FMLA violations, breach of contract and promissory estoppel.
Once it examined the FMLA more closely, the company discovered that Peters was not FMLA-eligible because he did not work at a site that had at least 50 employees and the company did not have 50 employees in the aggregate working within 75 miles of Peters’ work location. Peters, however, argued that his employer was “equitably estopped” from denying him coverage under the FMLA due to the company’s representations in its employee handbook and the two letters the company sent to him. Despite Peters’ equitable estoppel argument (the notion that given its representations to him in the handbook and the letters, the company was prevented, or “estopped,” from making an argument based on the eligibility requirements) the District Court granted summary judgment, dismissing Peters’ case.
The 7th Circuit reversed, though on slightly different grounds. The appellate found that it did not have to decide the “equitable estoppel” issue, since there were two other potential bases on which Peters could prevail. First, the 7th Circuit found that Peters might be able to prevail on his claim for “promissory estoppel.” Promissory estoppel is a quasi-contract theory in which the court finds that certain promises may rise to the level of a binding agreement if the person to whom the promises were made takes action in reliance and is injured as a result. For example, if a company made a job offer to an individual (the promise) and encouraged him to move across the country to accept the position, and the employee moved across the country to take the job (the reliance), and was damaged thereby (e.g., quitting his other job, selling his house, etc.) (the injury), the employer is prevented (or estopped) from denying the employee the benefits of the promises previously made.
In the Peters case, the court found that the employer’s handbook and the statements set forth in the letter could constitute promises under Indiana law upon which Peters had relied to his detriment.
Second, the court observed that the statements made in the employee handbook could simply be a unilateral contract offer, which Peters accepted by working for Gilead Sciences. The 7th Circuit noted, however, that the Indiana Supreme Court had not decided the issue of whether employee handbooks could rise to the level of binding contracts. Even if a handbook in Indiana did not constitute a contract, the appellate court concluded that Peters had set forth enough facts to pursue a claim under the legal theory of promissory estoppel.
As the 7th Circuit noted, “There is no reason employers cannot offer FMLA-like benefits using eligibility requirements less restrictive than those in the FMLA, and that is what Gilead did. Peters statutory ineligibility is irrelevant to the contract-based theories of liability.”
The Peters lawsuit is illustrative of several critical points. First, as I have observed in this Blog before, much of employment law is state law dependent. In Indiana, the courts apparently have yet to resolve the issue of whether the promises in an employee handbook can rise to the level of contract. Other states, however, have resolved that issue. In Minnesota, for example, our state Supreme Court decided about 25 years ago that handbooks could constitute unilateral contracts. Of course, that led to the use of disclaimers, boldly set forth in handbooks, to disabuse employees of the notion that it would be reasonable to view handbooks as contractually binding.
Second, there are times when state law provisions do interact with federal law. Here, the handbook analysis had direct bearing on the FMLA, a federal statute. Indeed, in some ways the federal statute complicated the situation because the FMLA requires that information about employee FMLA leave rights be included in employee handbooks (if the employer uses such a document). Moreover, the appellate court considered, but did not decide, whether Peters’ “equitable estoppel” argument would have required the employer to provide the otherwise ineligible Peters with rights provided by the FMLA. In the absence of Peters’ state law contract and quasi-contract claims, presumably the court would have reached this issue.
Third, the case illustrates the importance of crafting your employee handbook carefully. If you reference eligibility for statutory benefits, you’d better get it right. If you omit key statutory provisions, you may be obligating your company to provide benefits that exceed those of the statute or that apply to individuals who otherwise would not be eligible for the statutory benefits. There are at least two ways to address this potential problem. You could analyze each statute carefully and ensure that your summary descriptions are correct. Or, you could include a provision in your handbooks, specifying that the handbook only provides a short synopsis of the statute and, to the extent that the statute contains provisions governing eligibility or benefits not summarized in the handbook, the statute (not the handbook) will govern. This may not completely exculpate an employer that mischaracterizes a statute but it is better than the alternatives — either omitting key statutory provisions or attempting to incorporate the entire statute into the handbook.
Fourth, the Peters case also illustrates the importance of conveying information clearly, and accurately, in other employee communications. Don’t send out letters that paraphrase statutory provisions inaccurately. Don’t advise employees that they are entitled to benefits for which they would not be eligible. Do your homework before sending out the letters. Get legal advice to ensure that you are not making promises you do not intend to make. Otherwise, you may find yourself in the position of Gilead Sciences, having promised benefits that are quite likely to be enforced, regardless of the limitatons of the statute.
Finally, purely from an advocacy perspective, limit your arguments to those which are credible. As referenced above, one of the explanations that Gilead Sciences offered to Peters for why he had been replaced was that he was a “key” employee under the statute. The FMLA definition of a “key” employee is very circumscribed and there is no way Peters would have fit that definition. By including an argument that has virtually no chance of success, the company merely diminished its own credibility with the court.