February 2025 Volume 7

OPERATIONS & MANAGEMENT PROTECTING YOUR COMPETITIVE BUSINESS INFORMATION AND RELATIONSHIPS Where Does It All Stand Now? By Johanna Fabrizio Parker

T hose of us who practice in the labor and employment space certainly expect significant changes at the federal level given the election results. Historically, when the federal government does not act – or does not act in a manner that certain states want it to – we also see more state action. Two examples are the state laws as to marijuana use and to provide some paid sick leave (whether by requiring it of employers or a state insurance program). Another key area of state action is in the realm of what we lawyers call restrictive covenant agreements – non-compete, non-solicit and/or confidentiality agreements. Last year, the federal govern ment took aim at these generally with the Federal Trade Commis sion issuing what was effectively a ban on almost all non-competes as of September 4, 2024. Even before the election, we saw waves of changes here – with a Texas district court ultimately issuing a nationwide injunction to block the rule before it went into effect. The FTC did appeal the decision, but we generally do not expect the new administration to continue pursuing the appeal, with President Trump and his appointees generally being in favor of these types of agreements. In other words, practically the ban is done. So, you say – we are all set to go then? Not so fast. This is where the states have historically set the rules, and I expect more dispa rate activity as we go forward, with the states still free to set their own laws. A restrictive covenant is a contract, and contracts are governed by state law. Parties to a contract can designate which state’s law applies. I am sure you have seen these clauses, e.g., this contract is governed by the law of the state of ______. You can and should be sure you are applying the correct state’s law in the restrictive covenant context. But even then, it does not neces sarily guarantee that you will be governed by that state’s law – or if you are, what that state’s law will be when you are looking to enforce. In disputes, courts will look to see whether your desig nated state has a real connection to the dispute, such as this is the state where the employee actually works versus this is just where your company headquarters is located. And where more than one state could be the state with the most connection, a court will look to see whether there is a real substantive difference in the law. California, which generally bans non-compete and non-solicit agreements, even went so far as to say that, for an employee who

works in California, a company (a) cannot designate that the law of another state to try and get around California’s ban; and (b) as of February 14, 2024, employers had to individually notify any employee subject to an unenforceable agreement that such agree ment was void. California certainly is a well-known opponent of non-competes, but it is not alone. Several other states (e.g., Minnesota) have banned them as well, and multiple states have fashioned a “middle ground” by setting specific statutory restrictions, such as income level (e.g., Illinois). But most – if not all – states are looking more closely at the scope of restrictions. Have you set an appropriate time limit? Have you set an appropriate geographic limit? For those restrictions linked to your clients and customers, are they clients and customers with whom the employee interacted with in some way and/or had information about? So what do you do? Given what I see in my practice, restrictive covenants are widely used, so a company can be at a competi tive disadvantage if it does not have them in some capacity. Now, this is not to say that a “one-size-fits-all” approach is the preferred path forward here. First, that approach likely will create groups of individuals where the contract (or provisions of it) simply are not enforceable. And second, starting with a broad brush, a company may choose not to seek to enforce certain provisions against certain groups of employees. You may say: so what? But, in liti gation, both can be used against you. You can be sure that your opponent will bring forward a ruling – even from another court in another context – that the contract should not be enforced. And if you enforce selectively, you also likely will see some argument to the theme of: if you have such an interest to protect, why did you not try to enforce all these other same/similar contracts? You must not care that much about this “confidential information” you now are trying to protect, right? I understand that it is not necessarily practical to create an indi vidual agreement for each employee. But I do think you can look at groups of employees. For example, those individuals who work in your manufacturing operations can be a group. You may not need – or be able to enforce – a non-compete or non-solicit against those workers, but you can have an agreement requiring them to protect your confidential information. I see the sales team as another potentially separate group. Here, you may need every

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