State legislatures have had a very active 2015, passing several laws that affect the enforceability of noncompete agreements. Employers need to be aware of these laws; otherwise their noncompete agreements may not be valid and could expose them to unwanted competition. Here are five new state laws employers need to know about to ensure that their contracts are up to date and in compliance.
Bad news for Oregon employers. Starting January 1, 2016, employers in Oregon will only be able to prevent a former employee from competing for 18 months—six months less than the current maximum enforceable term. The good news is that the new law only applies to agreements entered into after January 1, 2016. However, Oregon employers will still need to revise their noncompete agreements for new hires.
Meanwhile, the Aloha State is not necessarily paradise for the tech industry. As of July 1, 2015, Hawaii law prohibits noncompete or nonsolicitation clauses in technology industry employment contracts. Despite this new limitation, technology business employers can still ban employees from disclosing an employer’s trade secrets so long as the restriction is reasonably necessary to protect the employer and does not impose an undue hardship on the employee.
The law is not retroactive so noncompete or nonsolicitation clauses that were in existence prior to July 1 are unaffected.
Effective January 1, 2016, a new Alabama law repeals the state’s noncompete law that has been around for 40 years. The new law still disfavors noncompete agreements, but will allow an employer to preserve a protectable interest, including:
- Trade secrets;
- Confidential information;
- Commercial relationships or contracts with specific prospective or existing customers, patients, vendors or clients;
- Customer, patient, vendor, or client good will associated with an ongoing business, franchise, commercial, or professional practice, or trade dress; and
- Specialized and unique training involving substantial business expenditures directed to a particular agent or employee if the training is specifically set forth in the contract as consideration for the restriction.
Under the new law, a court will have the ability to void or “blue pencil” a provision that is overbroad or unreasonable in its duration and reform it. If a restraint does not fall within the new law’s limited exceptions, a court may void the restraint in its entirety.
Arkansas employers do not need to speculate any longer on whether the terms of their noncompete agreements are reasonable. A new law that took effect August 6th provides clarity for employers on what terms are reasonable. Previously, employers needed to turn to multiple court decisions when drafting their noncompete agreements.
Similar to Alabama, a noncompete is enforceable if the employer has a protectable business interest, e.g., trade secrets, confidential information and intellectual property, with reasonable restrictions to protect those interests.
This new law also enables courts to “blue pencil,” or reform, a noncompete agreement to make it enforceable if the agreement’s provisions are ruled to be overbroad. This is to an employer’s benefit because previously an Arkansas court would invalidate the entire agreement if even one term (such as geographic limitation or duration) was unreasonable. Employers can now rest easy that if one term does not pass the “smell test” they may still be protected.
5. New Mexico
Since July 1, New Mexico protects health care practitioners–including dentists, physicians and podiatrists–from being subject to noncompete provisions in an agreement that restricts their right to provide clinical health care services. However, employers in this industry still have some protections such as:
- Nondisclosure provisions protecting confidential information and trade secrets;
- Nonsolicitation provisions for patients and employees who have been in the practice one year or less;
- The repayment of a loan, relocation expenses, signing bonuses or education and training expenses if an employee health care practitioner separates from a practice after less than three years and wants to compete; and
- Liquidated damages provisions if the amount is reasonable.
Also, shareholders, owners, partners or directors of a health care practice are still fair game.
Employers operating in these states, or who have employees working in these states, must be aware of these new laws when drafting employment contracts.