Companies with employees across multiple states face an administrative challenge. How do they ensure that their non-compete programs remain up to date with the various states law requirements for enforcement? Four states have recently passed legislation that reinforces the importance of addressing this question. The highlights below from the changing non-compete landscape should prompt companies to review their current non-compete programs and discuss strategies for ensuring that their non-competes comply with any new state laws that may affect their enforcement.
Arkansas Reforms. Arkansas’s new non-compete law takes effect on August 6, 2015, and provides non-compete drafters with some stress relief. Previously, Arkansas courts refused to reform non-competes that were overly broad. But now, the Arkansas legislature has stepped in, specifically instructing that courts “shall reform” overly broad non-competes so that they are reasonable with restraints “not greater than necessary to protect the protectable business interest.” Arkansas employers can now be more aggressive when drafting their non-compete’s geographic scope.
Hawaii Bans. Hawaii recently passed legislation banning non-competes and non-recruitment agreements within “technology businesses”— essentially, for software developers. This new law took effect on July 1, 2015, and unlike the Arkansas law that requires courts to enforce more non-competes, the Hawaii legislature found that these agreements do more harm than good within the software space. And it turned to academic studies as support: “Hawaii has a strong public policy to promote the growth of new businesses in the economy, and academic studies have concluded that embracing employee mobility is a superior strategy for nurturing an innovation-based economy. In contrast, a noncompete atmosphere hinders innovation, creates a restrictive work environment for technology employees in the State, and forces spin-offs of existing technology companies to choose places other than Hawaii to establish their businesses.” The Hawaii legislature also noted that technology businesses already receive trade secret protections through other state laws and that enforcing non-competes would allow duplicative relief. Many Hawaiian employers would likely disagree–but the act is now law.
New Mexico Aids. New Mexico’s new law became effective July 1, 2015, and allows doctors and healthcare practitioners to avoid non-compete restraints in employment contracts. But the New Mexico legislature pointed out that the law does not affect other clauses in these types of employment contracts, including non-disclosure covenants; liquidated damage clauses; and requirements to repay a loan, relocation expenses, signing bonuses, or educational expenses for doctors and practitioners who resign within three years of employment. So while doctors may not be restricted from competing, they still can be required to pay to compete.
Alabama Clarifies. Alabama repealed its old non-compete law and replaced it with a new one that will become effective January 1, 2016. Like the old law, the new one prohibits non-competes that do not preserve a “protectable interest.” But unlike the old law, the new law defines the types of interests that a non-compete can protect. The act limits the potential “protectable interests” to the following five categories: trade secrets; confidential information; commercial/customer relationships; good will; or specialized and expensive employee training. But the new law not only provides employers with some clarity on what is required, it also alleviates previous burdens of proof. Whereas employers were required to prove that the non-compete would not cause undue harm—now—the employee must prove undue harm before that affirmative defense will be applied. Not all aspects changed, though. The new law, for instance, still bans non-competes for professionals like doctors, lawyers, and accountants.
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These brief highlights demonstrate that non-compete laws remain fluid. Whether through court decisions or state legislatures, these laws are subject to change—which can cause unexpected consequences for employers overly confident in their non-compete’s validity. Companies should, at least, implement a policy to routinely confer with their counsel about whether their current non-competes still comply with current state laws.