Antitrust Scrutiny of Employment Restrictive Covenants
| Publication year | 2014 |
| Pages | 33 |
Articles
Antitrust Scrutiny of Employment Restrictive Covenants
By Todd R. Seelman, Katherine M.L. Pratt.
About the Authors
Todd R. Seelman is a partner in the Denver office of Lathrop & Gage LLP and chairs the Antitrust and Unfair Competition practice group firm-wide. His practice focuses on complex commercial litigation matters emphasizing antitrust, unfair competition, and employment law. He is an Adjunct Professor of Antitrust Law at the University of Denver's Sturm College of Law and currently serves as the Chair of the CBA Antitrust Subsection—tseelman@lathropgage.com. Katherine M. L. Pratt is an attorney in the Denver and Boulder offices of Berg Hill Greenleaf & Ruscitti LLP. Her practice focuses on complex commercial litigation matters, emphasizing employment law, civil rights, antitrust, and unfair competition law. She is a member of the CBA Antitrust Subsection— kmlp@bhgrlaw. com.
Faced with limitations on the use of employer-employee restrictive covenants, some employers have turned to employer-employer anti-poaching agreements to limit the mobility and compensation of their employees. Recently, such agreements have faced antitrust scrutiny and courts are skeptical regarding their legality.
Employers devote substantial resources, in time and money, to the development of proprietary products and services, and to training their employees. The primary tool employers use to protect their legitimate interests from competitor intrusion has been employment restrictive covenants.
Historically, employment restrictive covenants have been agreements between the employer and a single employee that govern the post-employment conduct of the employee. The affected employee is well aware of the restriction and, in some cases, may have been able to negotiate with the employer regarding such restrictions and the consideration given for entering into such agreements. Because employer-employee restrictive covenants impair the movement of a single employee within a particular labor market, their enforceability historically has been governed by state noncompetition laws, which ask a court to weigh the legitimate interests of the employer, the degree of impairment on the departing employee, and the state's interest in the free flow of labor in that state. Restrictive covenants that violate state noncompetition laws generally are rendered void and unenforceable, although in some states, courts are permitted to strike objectionable provisions or to rewrite an offending restriction to render the remainder enforceable.
In the last several years, however, there has been an increase in the use of restrictive covenants between employers. These employer-employer restrictive covenants are agreements between employers that restrict the post-employment movement of their employees within a particular labor market. This restriction distinguishes such agreements from traditional noncompete agreements because the affected employees are, in most cases, completely unaware of the restriction. The larger the number of affected employees within a particular labor market, the greater the risk that the restriction will be scrutinized under the antitrust laws rather than by traditional state noncompetition laws. This is particularly true when the employers are competitive rivals. This article will examine the interplay between employment restrictive covenants and antitrust laws. It also includes a brief discussion to the pending employment antitrust case In re High-Tech Employee Antitrust Litigation.[1]
Employer-Employee Restrictive Covenants
Employer-employee restrictive covenants are quite common and generally take three forms: (1) noncompetition covenants; (2) non-solicitation covenants; and (3) nondisclosure covenants. Noncompetition agreements restrict employees from directly working for competitors of the former employer. Non-solicitation agreements restrict employees from contacting the current employees and/or customers of the former employer (these also have been referred to as "no-poaching" or "anti-poaching" agreements). Nondisclosure agreements restrict employees from disclosing the former employer's proprietary information.
Traditionally, enforceability of employer-employee restrictive covenants has been determined by the state law where the restraint is imposed. State laws on these types of restrictive covenants vary considerably. Some states, such as California and North Dakota, ban noncompete agreements except in very limited circumstances.[2] Other states, such as Texas and Florida, place few restrictions on such provisions.[3] A new law is before the Massachusetts Legislature that would place greater restrictions on noncompete clauses.[4] The debate centers on whether such restrictions are reasonable business measures designed to protect a company's intellectual property and human resources or whether they are onerous restrictions on an employee's ability to earn a living.[5]
In general, in those states that permit employer-employee restrictive covenants, the state law focuses on five considerations:
1) the state's public policy to protect the mobility of its labor force;
2) the legitimacy of the former employer's business interests;
3) consideration given and received for the restriction;
4) the precise restrictions placed on the departing employee; and
5) whether the restrictions go no further than necessary to protect the employer's legitimate business interests in terms of
(a) the duration of the restriction;
(b) the breadth of the geography involved; and
(c) the scope of the restricted activities post-employment (compared to the employee's activities during employment).
Although the remedies also vary state by state, generally, if the restrictions violate the state law, then the court either will void the restriction altogether (rendering it unenforceable), or modify the language in some fashion to make the restriction partially enforceable.
Colorado Noncompetition Analysis
CRS § 8-2-113 provides the statutory framework for the courts to address noncompetition restraints, including those used in the employment context. In general, Colorado law provides that covenants not to compete are void, except in four situations:
1) a contract for the purchase and sale of a business or the assets of a business;
2) a contract for the protection of trade secrets;
3) a contractual provision providing for the recovery of the expense of training or educating an employee, when the employee has worked for the employer for fewer than two years; and
4) a contract between executive and management personnel, officers, and employees who constitute professional staff and executive and management personnel.[6]
Employers frequently attempt to argue that a noncompete agreement with an employee falls within the fourth exception.[7] Whether an employee is an executive or management personnel has been a source of consternation for employers and courts faced with determining whether a noncompetition agreement is legally enforceable.
In 2009, the Colorado Court of Appeals analyzed this question in DISH Network Corp. v. Altomari, and ruled that a mid-level manager at DISH Network fell within the definition of "executive and management personnel."[8] Although the court noted that whether an employee is an "executive and management personnel" is ordinarily a question of fact, the court found that defendant Altomari was executive or management personnel, given that he supervised approximately fifty employees in a division with an annual budget of $10 million.[9] The court rejected Altomari's contention that because he was not a...
To continue reading
Request your trial