Thursday, February 27, 2014

Healthy Rivalries Part 2: Choice of Law Provisions in NonCompete and Anti-Solicitation Agreements

I had good responses to my previous post about noncompetes, some of which asked me to fill in the blank I intentionally left: What happens when there's a "choice of law" provision in the noncompete or anti-solicitation agreement? Will the agreement be enforced?

This gets very complicated, so it's best to start off with an understanding of what a "choice of law" provision is.

Every state has its own set of laws. The laws of one state may be quite different from the laws of another. When two parties sign a contract, it will usually be interpreted under the law of the state where the contract was formed.

When signing a contract, though, the parties can agree that a different state's laws will apply. Usually, the different state will have some connection to one of the parties. So if party A, for example, is a California worker, and party B is a Minnesota employer, the parties could include a "choice of law" provision in the employment contract that it will be interpreted under Minnesota law.

So here's the issue: what happens when the contract is with an employee in California, where covenants not to compete are illegal, but includes a choice of law provision to be interpreted under the laws of Minnesota, where they are legal?

The answer as to whether it will be legal or not depends on who gets a judgment from a court of law first.

California has declared that its policy against noncompetes and anti-solicitation agreements is so strong that it won't enforce one *even when there's a choice of law provision applying another state's laws.* In other words, if the contract with a noncompete stating that is will be interpreted under Minnesota law is brought in a California court, it will still be found to be illegal.

There's a catch, however. Let's say the employer brings a lawsuit in Minnesota, asking the court to prevent the employee from working for a competitor and to enforce its noncompete. Minnesota will honor such a noncompete (if it complies with the "rule of reasonableness" that I discussed in my last post), and issue such an order.

Now, if Minnesota enters its order *before* a California court can enter its order, California *will honor the Minnesota ruling* and require the employee to follow it. This is called the "rule of comity," in which one state will honor the rulings of a sister state, even if the one state would not have come to the same conclusion.

In other words, California has established the need for a race to judgment when it comes to noncompetes and anti-solicitation agreements. California has decided that whoever gets their judgment first wins.

This is bad policy, because it actually encourages people and companies to sue each other. I've even been in the position of telling employees that they might have to consider a preemptive lawsuit when these issues have come up. Nonetheless, this is the current state of the law in California.

Conflicts among state's laws often create challenging legal problems and bizarre results. This is an example, and California's solution creates a lot of practical difficulties.

Tuesday, February 25, 2014

Healthy Rivalries: NonCompetition and Anti-Solicitation Agreements in California

Many of us have seen them: noncompetition and anti-solicitation agreements that are built into our employment contracts. They tell us that, when we leave or are fired and for maybe a year or two afterward, we can't work for a competing business. Maybe they tell us that we can't solicit our employer's clients when we leave.

Because we need the job, we try not to think too much about it when we sign. Years later, when we leave for another company, or maybe when we're fired, or maybe when we leave to start our own business, we wonder if that agreement will come back to haunt us.  Can we work somewhere else? Can we compete for business? Can we even make a living now? Are we going to get sued?

For more than 150 years, California has held that noncompetition agreements are illegal, with only a couple of exceptions. (Those exceptions include the sale of the goodwill or ownership of a business or its operating assets, as well as the dissolution of a partnership.) So far as I know, California is the only state in the union with this virtually absolute prohibition. Other states have what is called the "rule of reasonableness," meaning that, if the noncompetition agreement is reasonable in time (say, a year or two, though some have held that 5 years or more is reasonable; imagine going 1 year, let along 5 years, without being able to ply your trade!) and space (meaning limited in geographical location, say to a city or county), then it will be enforced.

Not so in California. Noncompetition agreements in California are void, unenforceable, and even illegal, regardless of whether they are "reasonable" or not. The "rule of reasonableness" has been completely rejected in California.

In other words, you are always (with the minor exceptions noted above, and possibly the "choice of law" issue discussed below) free to work wherever you want in California.

Sometimes, employers complain that their former employees will inevitably use their trade secrets when they work elsewhere. In other words, the former employee can't help but use the secret information that they learned at their previous employer in their new job.

Again, California has completely rejected the "inevitable use" argument. To keep you from working elsewhere, the employer must show that you actually have improperly used trade secrets. Claiming that you inevitably will can't prevent you from working elsewhere.

Anti-solicitation agreements are also generally illegal. You can even solicit your former employer's customers, regardless of what you signed with your former employer. This is especially important for sales people, who spend their careers building relationships and customer lists. The only restriction is that you cannot use your former employer's trade secrets in doing so. (Some cases have held that you can't use "confidential or proprietary" information either, but those terms have never been defined, and the trend is away from that.)

So what's a "trade secret?"

A trade secret is defined as having two parts: (a) it must be the subject of reasonable efforts to keep it secret, and (b) it must derive value from the fact of being secret. Examples might include computer algorithms or software code, specific pricing information, or even hiring and training practices.

Customer lists are almost never trade secrets, although they are the things that I see employers most often claim to be trade secrets. That's because they're valuable, and so they want to keep you from using them.

It's usually pretty easy to demonstrate that customer lists aren't actually trade secrets. Employers frequently post testimonials or lists of their customers on their websites, for example. If it's not a secret, it sure isn't a trade secret.

Does all of this mean you won't be sued if you go work elsewhere? Unfortunately, it doesn't mean that. Employers who are ill-informed, or even misinformed by their own attorneys unfamiliar with this law, may seek to enforce an illegal noncompetition or anti-solicitation agreement by suing you. If that happens, it's important to contact an attorney immediately. Don't wait -- the first thing they usually do is write a letter, but then they may file for a temporary restraining order (TRO) to prevent you from working in your new place. Don't bury your head in the sand. Get an attorney quickly. A well-written, well-informed letter can often get rid of the lawsuit all by itself. If it doesn't, you'll want a good attorney on your side to ensure you can keep making a living.

Sometimes, there are "choice of law" provisions in these contracts. That means that you agreed to have the law of the sovereign state of EmployerFriendlyScrewTheWorkers apply to you. This gets very complicated, it's beyond the scope of this quick blog post, and you'll need an experienced attorney to figure it out for you.

But how will you pay an attorney to help you out? If you've found a new place to work, your new employer may be required by Ca. Lab. Code §2802 to defend you against such a lawsuit. Furthermore, recent caselaw has held that it would be illegal for your new employer to fire you just because a former employer is trying to enforce an illegal noncompetition agreement or anti-solicitation agreement.

Even though these agreements are generally illegal, I still see them all the time in employment contracts. It's important to know what you can do and what you can't if you've signed one of them.

Thursday, February 6, 2014

Disability Rights -- "Reasonable" is Written Right into the Law

The laws protecting disabled employees in the workplace aren't that complicated, and they're not onerous. In fact, the law uses the word "reasonable" over and over again to describe the protections afforded disabled workers.

California and federal law are very different in this area. Although California's Fair Employment & Housing Act ("FEHA") was modeled after the federal Americans with Disabilities Act ("ADA"), the FEHA has developed much differently through the years. So throughout this post, I'll be talking about the FEHA. Just be aware that the ADA may be substantially different.

First of all, what does it mean to have a disability? The FEHA defines a disability as any physical or mental impairment that limits a major life activity. (This is the first big difference between FEHA and ADA. The ADA requires that the impairment "substantially limit" a major life activity. An amendment to the FEHA removed the word "substantially," and now requires only a limitation.) Major life activities include walking, talking, breathing, digesting, and a host of others.

Much like race, age, sex, religion, and other protected characteristics, an employer can't discriminate against an employee because of a disability. That *doesn't* mean the employer can't fire someone with a disability; it means the employer can't fire someone *because* of a disability. If a disabled worker is doing poor work, he can be fired just like anyone else.

The law gets more involved when it comes to accommodating an employee with a disability. Any employee qualified to do the job must be provided a reasonable accommodation if it can be done without undue hardship to the employer.

That's just one sentence, but there's a lot to it. Starting at the beginning, a "qualified employee" is one who can perform the primary functions of the job with or without a reasonable accommodation. "Primary functions" don't include remote or trivial functions. For example, the primary functions of an outside salesperson might include driving to meet with customers, or entering sales information in a spreadsheet. For an outside salesperson, sweeping the floors or closing the shop at night might not be primary functions. "Primary functions" are determined based on what the employee actually does on a day-to-day basis, not just on what's in the job description.

The law protects employers, as well as employees, by requiring that the employee be able to perform those primary functions. In other words, if a disabled employee can't perform the primary functions of the job, the employer is free to fire that employee.

Before doing so, however, the employer must find out if a reasonable accommodation is available that could help the employee perform the job's primary functions. For example, suppose our outside salesperson had arthritis, which impacted the major life activities of grasping and holding objects. Arthritis probably qualifies as a disability (whether it does or not depends on how it affects the particular individual, but let's assume here the effect is enough to qualify as a disability). Suppose also that this salesperson's arthritis prevented entering sales data into a spreadsheet, which we said before was a primary function of his job. Is there a reasonable accommodation that exists that could help that person do the job?

To find out, the employer must engage in what the law calls a "good faith, interactive process" (GFIP) with the employee. That essentially means they must talk with one another, in good faith, to see if there's some accommodation that will allow the disabled employee to do the job. For example, the employee might suggest that the company buy voice recognition software to help with the data entry. Perhaps a larger keyboard with bigger keys will allow the salesperson to type without pain.

It may be possible that an assistant could help the salesperson with data entry. If the employer is very small, it might conclude that hiring an assistant would be an undue hardship. The law looks at each individual case to determine what is reasonable under those particular circumstances.

The point of the law is to keep people with disabilities working to the extent that they can do the job and remain productive. The law is written to require employers and employees to interact to see what can be done to accomplish that goal. When both sides are reasonable, and engage in good faith, the law works well.