Post-Employment Restrictive Covenants
Parting Ways Professionally: Key Considerations in Drafting Separation Agreements
When it comes to agreements governing an employee’s separation from employment, the fine print matters—and in New York, that print has recently become even finer. Courts across the state have enforced tightened requirements on what employers must do to draft valid separation agreements, applying new statutes governing confidentiality clauses and strictly enforcing consideration and revocation timelines. Gone are the days of dusting off a boilerplate separation agreement template. In this article, we analyze and distill several recent developments in New York concerning separation agreements and provide some practical guidance to employers seeking to draft strong agreements. Confidentiality Clauses To begin, General Obligations Law § 5-336(3)(b), enacted in 2023, invalidates the “release of any claim, the factual foundation for which involves unlawful discrimination, including discriminatory harassment, or retaliation…if as part of the agreement resolving such claim…the complainant is required to forfeit all or part of the consideration for the agreement, for violation of a nondisclosure clause or non-disparagement clause.” Practitioners have questioned whether, in light of this rule employers may continue to include in their separation agreements confidentiality clauses intended to protect their trade secrets and confidential information, or if the statute should now be read to ban such clauses if the separation agreement includes a release of discrimination, harassment, or retaliation claims. A recent New York case answers these questions. In Corcino v. N.Y. Times Co., 2026 N.Y. Misc. LEXIS 2748, *1 (Sup. Ct. N.Y. Cnty. Apr. 7, 2026), the court evaluated whether a separation agreement containing non-disclosure and non-disparagement clauses remained enforceable even when the plaintiff entered the agreement following plaintiff’s allegations of employment discrimination and retaliation. The court upheld the non-disclosure and non-disparagement clauses because the agreement expressly stated that the employee could still reveal the underlying facts or circumstances of claims of discrimination. The court reasoned that the law “was never intended to make all non-disclosure and non-disparagement clauses, such as those pertaining to trade secrets and proprietary information, unenforceable.” Instead, the “legislative intent was to make unenforceable certain non-disclosure and non-disparagement clauses that imposed liquidated damages on a complainant for disclosing facts related to retaliation, discrimination, or harassment.” Drafting Implications The Corcino case holds that attorneys can continue to include non-disclosure and confidentiality clauses in separation agreements that include releases of claims of discrimination, harassment, and retaliation, so long as such clauses do not prevent disclosure of the underlying facts of the wrongful conduct or impose a liquidated damages clause. Assuming an employee has previously asserted a “claim” of discrimination, harassment, or retaliation prior to executing the separation agreement, practitioners would be prudent to include language in the agreement stating explicitly that the employee retains the right to disclose the underlying facts and circumstances of such claims. Employers similarly may wish to make explicit that no liquidated damages or financial penalties attach to such disclosure. If an employer wishes to enter a nondisclosure agreement with a departing employee with respect to the factual basis for claims of discrimination, harassment, or retaliation, the law provides a mechanism for the employer to do so. Under 5-336(b), an employer and employee may agree to such a condition “in writing…in plain English,” provided that the employee receives “up to twenty-one days to consider such term or condition” and that the employee’s preference for confidentiality is “memorialized in an agreement signed by all parties” and revocable for “at least seven days following the execution of such agreement.” Group Terminations Separate and apart from confidentiality clauses, a number of recent New York cases have clarified how courts evaluate group terminations. As employment lawyers know, the Older Workers Benefit Protection Act (OWBPA) imposes strict procedural requirements for a valid the Age Discrimination in Employment Act (ADEA) waiver. Generally, the OWBPA requires individuals to, among other things, receive at least 21 days to consider the separation agreement and seven days to revoke the agreement containing the waiver following its execution. The absence of these procedural requirements invalidates the separation agreement in its entirety. However, several recent cases raise an additional pitfall that employers must consider: What happens when an employer terminates the employment of a group of employees? Under the OWBPA, when there is a “group termination”, the employer must give the employees 45 days to consider the proposed separation agreement rather than 21 days, and the employer also must provide the employees with certain details about the so-called “termination program” under which the separation occurs. The definition of “group termination” is critical for employers to understand to comply with the statute, but the statute itself is silent as to what constitutes a “group termination.” The case of Gerrits v. IBM Corp. , 2022 U.S. Dist. LEXIS 93321, *4 (S.D.N.Y. May 24, 2022) clarified the definition of group termination. There, the court held that indicia of “group” terminations include the use of a standardized formula or package of employee benefits that is available to more than one employee; lack of negotiation between the parties; and advisement from the employer that the termination is not a function of the employee’s individual status. The court further observed that normally one would expect an employer to provide a package of benefits to two or more employees for the termination to be part of a “group termination” as that term is used in the statute. In Gerrits, plaintiffs failed to make this showing. The court noted that plaintiffs were terminated individually over a period of years with no apparent groupings or waves of terminations or other unifying factors. In addition, the employer gave each employee “a specific, individualized reason for his or her termination.” When drafting separation agreements employers also should keep in mind that drafting a valid ADEA release may not be enough to shield the employer from discovery in the event of litigation over alleged discrimination in connection with a termination of employment. For example, in Dale v. L’Oreal USA, Inc., 2023 U.S. Dist. LEXIS 102693 (E.D.N.Y. Jun. 13, 2023) a valid ADEA release was not enough for the employer to escape discovery into the facts underlying a purported group termination. In Dale, the court considered the parties’ separation agreement and supplemental release but found that it could not conclude from those documents at the motion to dismiss stage that plaintiff’s release of any ADEA claims pursuant to that agreement was knowing and voluntary, pursuant to the specific requirements of the ADEA. The court found that the separation agreement appeared to comply with many of the ADEA’s requirements. However, the court could not decide “without discovery whether the list of affected employees that Defendant provided as an exhibit to the Separation Agreement was accurate and conveyed all of the information required by the ADEA.” Drafting Implications To optimize separation agreements for individual employees, employers would be prudent to give each employee the reason for the termination of employment. Employers further would be well served to individualize the separation packages and benefits offered to individual employees to avoid any appearance that the terminations were connected where no actual connection existed in the separate termination decisions. As for group terminations, employers should comply with the OWBPA and ADEA, which require employers to include, among other things, details concerning the “termination program” governing the offer of severance benefits. Employers should be prepared for litigants who may seek to demand discovery into the termination program even if the separation agreement satisfies all statutory requirements. For larger terminations, employers also should confirm compliance with other laws, such as the Worker Adjustment and Retraining Notification Act of 1988 (WARN Act), to determine whether the group termination satisfies any separate legal requirements that may exist. Two-Stage Releases Another common scenario that arises when employers are drafting separation agreements is when an employer terminates the employment of an employee who will continue to work for the employer after the employee executes the separation agreement. In such circumstances, employers frequently structure their separation agreements to include two parts. The first part involves the employee signing the separation agreement, including the release of claims, during employment. The second part involves the employee signing a document that updates the period covered by the release of claims following completion of the employee’s period of employment and subsequent termination of employment. The two-stage release structure serves an important function. Because separation agreements that comply with the OWBPA may not release claims arising in the future, the agreement will typically include releases of claims arising up to the date that they were signed. The second document, on or after termination of employment, updates the release of claims to capture any claims arising after the signing of the original separation agreement but before termination of employment and reaffirms the parties’ intent to achieve a global resolution of any disputes relating to termination of employment. See, e.g., Nelson v Lattner Enters. of N.Y., 108 A.D.3d 970 (3d Dep’t 2013) (employee executed two release agreements on two separate dates). Drafting Implications When using this structure, employers frequently draft one agreement containing the complete terms of the separation agreement including a clear specification of the consideration for the release of claims. That initial agreement will typically provide that the employee will sign the first agreement during employment, and that the employee will sign a second document that updates the release of claims no earlier than the employee’s last day of employment. The agreement will condition delivery of any severance pay or benefits on the signing and effective date of both the initial agreement and the document updating the release of claims. Conclusion Separation agreements and releases remain powerful tools for employers seeking to resolve or minimize employment disputes without litigation. But to obtain that benefit, employers should be aware that courts scrutinize these agreements carefully, and statutory protections continue to evolve. New York’s GOL § 5-336 restricts confidentiality and non-disparagement clauses in discrimination cases, but it does not eliminate them—employers may still protect trade secrets, proprietary information, and settlement terms so long as employees retain the right to disclose the underlying facts of discrimination. The OWBPA imposes strict requirements for ADEA waivers, with heightened obligations for group terminations. And strategic use of two-stage separation agreements can capture all claims through the final separation date, provided that the separation agreement is knowingly, voluntarily signed, and supported by adequate consideration. Employers and their counsel would be prudent by drafting their separation agreements with precision, maximizing compliance with applicable statutes, providing employees with the information and time needed to make informed decisions, and building a record that will withstand judicial review. These practices strengthen enforceability and reduce litigation risk. Reprinted with permission from the October 6, 2026 edition of the New York Law Journal © 2026 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.
October 6, 2026
by Nicholas J. Pappas and Nicholas Wing
Post-Employment Restrictive Covenants
Managing Multistate Employment Compliance
For employers with employees across multiple states, a single workplace policy can quickly become a multistate compliance issue. Federal law often provides the baseline, while states and local jurisdictions may impose additional or different requirements. The first question for employers is often a simple one: where are your employees working? During Dorsey’s 2026 Labor & Employment Symposium, Dorsey attorneys Ryan Gehbauer, Josh Hughes, Susan Lorenc and Zoe Spector joined Katie Ervin Carlson, Chief Counsel-North America Employment Law at Howden US, to discuss practical strategies for managing these overlapping requirements. For employers with employees across multiple states, a single workplace policy can quickly become a multistate compliance issue. Federal law often provides the baseline, while states and local jurisdictions may impose additional or different requirements. The first question for employers is often a simple one: where are your employees working? During Dorsey’s 2026 Labor & Employment Symposium, Dorsey attorneys Ryan Gehbauer, Josh Hughes, Susan Lorenc and Zoe Spector joined Katie Ervin Carlson, Chief Counsel-North America Employment Law at Howden US, to discuss practical strategies for managing these overlapping requirements. Four steps for multistate employers to consider: Map your footprint. Know where your employees are physically working, including remote employees. Categorize the issue. Some areas of employment law vary much more significantly from state to state. Paid leave and sick time, wage payment rules, restrictive covenants, and pay transparency are among the areas the panel identified as having particularly high variance. Identify the applicable requirements. Federal law may provide the floor, but state or local law may impose additional requirements. Employers should understand how those layers interact before adopting a policy. Choose the right approach. Depending on the issue and the employer’s footprint, the best solution may be a national policy, state-specific addenda, or a hybrid approach. There is no single approach that works for every employment issue. For example, the panel discussed how a multistate employer might use different templates for restrictive covenant agreements based on the employee’s location and role. That approach still requires ongoing review because state requirements continue to change and some jurisdictions require individualized analysis. Paid leave presents a different challenge. Requirements can vary significantly among jurisdictions, and a policy that is more generous to employees does not necessarily satisfy every state’s specific compliance requirements. The panel’s takeaway for multistate employers: know your footprint, consider where laws vary most before drafting policies, and build a process for reviewing policies as employees enter new states or laws change. National policies can create consistency, but employers should consider whether state-specific requirements could create unintended consequences. This post highlights key takeaways from “One Company, Fifty Rulebooks: Practical Strategies for Multistate Employment Compliance,” a panel presented at Dorsey’s 2026 Labor & Employment Symposium.
September 21, 2026
by Susan Lorenc, Ryan Gehbauer, Joshua Hughes, and Zoe Spector
Post-Employment Restrictive Covenants
Washington State Prohibits Non-Competes and Many Non-Solicitation Agreements
On March 23, 2026, Washington’s Governor Bob Ferguson signed a law that eliminates non-compete agreements, severely restricts non-solicitation agreements, and imposes other requirements related to all Washington employees. Who is covered? This law applies to all employees in Washington, even if their employer is based elsewhere. My company is based outside Washington state, and we have only one employee there. Does the law apply to us? This law applies to all employees in Washington, even if their employer is based elsewhere. We’re a really small company, does it apply to us? Yes. The Act includes all entities employing one or more people and which has business activity in Washington. Even if the company is small, and even if it is based elsewhere. What is prohibited? The law defines a non-compete agreement to include any written or oral covenant, agreement or contract that “prohibits or restrains” a worker (employee or independent contractor) from engaging in a lawful business. The phrase is to be liberally construed against enforcement of a noncompetition covenant. The law gives several examples, including contracts that “directly or indirectly prohibits the acceptance or transaction of business with a customer,” or between performers and locations. How about retention incentive agreements or training benefits? The law expressly prohibits any threat or demand that an employee repay or return any compensation or benefit as a consequence of engaging in a lawful profession. This arguably includes stay incentives, training benefits conditioned on continued employment, and the like. There is a limited exception for educational expenses, so long as the covenant expires within 18 months of the start of employment (not the start of the educational program), it is limited to pro rata repayment and releases the obligation if the employee is separated based on “good cause” (a defined term). Are there exceptions? Yes, but narrow ones. Nonsolicitation agreements are allowed, but not if they ““directly or indirectly” prohibit the acceptance or transaction of business with a customer. This language is intentionally very broad. Restrictions on confidentiality, trade-secret protections, and sale of goodwill of a business are allowed (but then only if the person signing the covenant owns 1% or more of the business), and some franchisee agreements. What if I have an existing noncompete agreement with an employee who moves to Washington from out of state? The new law would apply to that employee and the noncompete agreement would be unenforceable. Does the law require me to do anything? Yes. By October 1, 2027, employers must make reasonable efforts to provide written notice to all current and former employees and independent contractors whose noncompetition covenant is still within its effective time period that their noncompetition covenant is void and unenforceable. When does this law start? The Act generally takes effect June 30, 2027. The written notice must be sent by October 1, 2027. What should I do now? Employers should review all noncompetition, nonsolicitation, and confidentiality agreements now to ensure either compliance or an orderly transition of agreements. This includes handbooks, policies, and other documents which could directly or indirectly impose an unlawful restraint. Employers should also begin planning for the employee notice (due on October 1, 2027). Experience in other states cautions that this process can be more complicated and time-consuming than expected.
March 31, 2026
by Aaron Goldstein and Michael Droke
Post-Employment Restrictive Covenants
The General Counsel for the National Labor Relations Board (“NLRB”), Jennifer Abruzzo, has recently issued two memorandums significantly changing how employers must draft separation agreements and opining on the enforceability of noncompetition agreements. Can she do that?
Abruzzo has been busy. Within the last few months, she has issued two notable memorandums that could have significant impacts on how employers must comply with the National Labor Relations Act (“NLRA”). It is important to note that certain provisions of the NLRA apply to all employers, not only those that currently have unions or are facing union election petitions. What was the first memorandum? Abruzzo issued a memorandum on March 22, 2023 in response to the NLRB’s decision in McLaren Macomb, 372 NLRB No. 58 (N.L.R.B. February 21, 2023). (We analyzed that decision in detail in another Quirky Questions blog post, linked here; in sum, the NLRB held in McLaren that an employer offering a separation agreement with non-disparagement and confidentiality provisions was inherently coercive, and therefore was facially a violation of the NLRA.). One important thing to note: the logic and reasoning of McLaren likely apply equally to settlement agreements that resolve litigation brought by a former employee, in addition to separation or severance agreements entered at the time an employee’s employment ends. The General Counsel’s memorandum in response to McLaren went beyond explaining the ruling. Instead, Abruzzo took the position that the decision not only applied to future separation agreements, but also applied retroactively – meaning that, in her view, employers who tried to enforce non-disparagement and confidentiality provisions in agreements with previously departed employees faced the risk of an unfair labor practice (“ULP”) charge under the NLRA. The memorandum also asserted that employers may maintain non-defamation clauses in separation agreements, but those clauses must be “narrowly-tailored, justified,” and “limited to employee statements about the employer that meet the definition of defamation as being maliciously untrue, such that they are made with knowledge of their falsity or with reckless disregard for their truth or falsity.” Finally, the memorandum outlined Abruzzo’s position that other provisions in separation agreements that might interfere with an employee’s Section 7 rights under the NLRA include non-compete clauses – a point on which she expanded earlier this week. What was the second memorandum? The second memorandum was issued on May 30, 2023, and expanded upon Abruzzo’s view that non-compete clauses violate the NLRA. In this memorandum, Abruzzo asserted that employers that require and enforce non-compete agreements with employees run afoul of the NLRA. Abruzzo believes that non-competition agreements chill an employee’s exercise of their Section 7 rights under the NLRA, because “employees know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions; employees’ bargaining power is undermined in the context of lockouts, strikes, and other labor disputes; and, an employer’s former employees are unlikely to reunite at a local competitor’s workplace, and, thus be unable to leverage their prior relationships—and the communication and solidarity engendered thereby—to encourage each other to exercise their rights to improve working conditions in their new workplace.” Abruzzo also argued in the memorandum that non-competition agreements discourage employees from exercising Section 7 rights because (1) any employees’ threats to resign in connection with demanding better working conditions will be seen as “futile” by the employer, since the employer knows the employee lacks access to other employment opportunities; (2) employees will refrain from actually resigning following a threat to do so in demanding for better working conditions; (3) employees are unable to seek or accept employment with competitors to obtain better working conditions; (4) employees are unable to solicit their co-workers to work for a competitor to obtain better working conditions; and (5) employees are unable to see employment with the goal of engaging in protected activity, such as union organizing, with other employees at their employer. While Abruzzo indicated there may be “special circumstances” in which a non-competition agreement is reasonable, such as protecting proprietary or trade secret information, or narrowly-tailored provisions “that clearly restrict only individuals’ managerial or ownership interests in a competing business, or true independent-contractor relationships,” she maintained that for the most part non-competition agreements are unenforceable. Abruzzo also categorically believes that an employer’s justification for a non-competition agreement will likely never be reasonable when the agreement is with “low-wage or middle-wage workers who lack access to trade secrets or other protectible interests, or in states where non-compete provisions are unenforceable,” and that “a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.” Do Abruzzo’s memoranda carry the force of the law? No. In fact, the press release for the memorandum regarding McLaren includes a disclaimer stating that the McLaren memorandum represents Abruzzo’s views, not those of the NLRB. With that said, it is important to understand that Abruzzo’s memoranda are directives to NLRB prosecutors across the country, who now will be expected to view confidentiality provisions, non-disparagement provisions, and non-competition agreements as potential ULPs under the NLRA which, in turn, subject employers accused of the ULP to a range of sanctions that have been expanded by Abruzzo during her term in office. Finally, employers should also remember that non-competition agreements are under increasing scrutiny and greater legal restrictions across the country. In January 2023, the Federal Trade Commission proposed a rule banning almost all non-competes (on that proposed rule, our previous commentary is linked, here). The FTC received a substantial number of comments on that proposed rule. In addition, many states have passed recent legislation banning or limiting non-compete agreements, including a law that will take effect in the state of Minnesota on July 1, 2023.
June 2, 2023
by Jack Sullivan
Post-Employment Restrictive Covenants
Can employers require employees to accept confidentiality and non-disparagement obligations in exchange for severance pay?
Employee reductions and terminations are an unfortunate result of economic downturns. Even during good economic times, many companies face the need to reduce their workforce or terminate the employment of individual employees. In such circumstances, employers may seek to offer severance pay in exchange for certain releases and promises by the departing employee requiring a severance agreement. The drafting of severance agreements can be complex, given that there are various federal and state laws that prohibit or narrow the provisions that can be included in the severance agreement. The use of confidentiality and non-disparagement provisions has recently come under scrutiny again. This article summarizes the legal issues that an employer must consider when deciding whether to include such provisions in a severance agreement. What is the impact of the National Labor Relations Board’s decision in McLaren On February 21, 2023, the National Labor Relations Board (“NLRB”) issued a decision, McLaren Macomb, 372 N.L.R.B. No. 58 (2023), finding that an employer violated Section 7 of the National Labor Relations Act (“NLRA”) by offering employees a severance agreement containing provisions stating that the terms of the agreement were confidential and prohibiting the employee from making any disparaging statements about the employer. Even if the employee ultimately did not sign the agreement, the NLRB found that the mere proffer of these terms to the employees as part of a severance package could be a violation of the NLRA. Communications by covered employees are protected by Section 7 even if they contain comments that would be considered “disparaging” towards the employer. Does McLaren apply to non-union workplaces? Yes. Section 7 of the NLRA protects employees’ right to engage in concerted activity for “mutual aid and protection,” which includes discussing the terms and conditions of their employment. Section 7 applies in union and non-union workplaces. Does McLaren apply to all severance or separation agreements?? No. Only individuals who meet the statutory definition of “employees” – which does not include executives, supervisors, and most managers – have rights under Section 7 of the NLRA. Does the NLRB’s decision mean confidentiality and non-disparagement provisions can no longer be included in severance agreements? Not necessarily. Employers will now, however, have to engage in a risk assessment in determining whether to include such provisions. For example, in reductions in force (“RIFs”) where the severance is formula-based, the need to include a confidentiality provision is diminished by the fact that there will be many departing employees. Therefore, prohibiting the departing employees from discussing their severance agreements with fellow co-workers who were selected for the RIF adds very little value to the employer. In contrast, where a severance agreement is presented to an individual employee as a compromise, employers may include a confidentiality provision with a definition of “Confidential Information” that is tailored to avoid implicating the terms and conditions of employment that are the core protections of Section 7 of the NLRA. Similarly, following the McLaren decision, employers that want to continue to include non-disparagement provisions in severance agreements could do so only with specific language. Non-disparagement provisions should, for example, be narrowly tailored to prohibit defamatory statements in accordance with the defamation laws in the applicable jurisdiction to be permissible under McLaren. Is this the first time a federal agency has taken action with regard to provisions in these types of agreements? No. The Equal Employment Opportunity Commission (“EEOC”) is another federal agency keeping an eye on confidentiality and non-disparagement provisions in severance agreements. The EEOC has taken the position that no agreement between a departing employee and an employer can limit the departing employee’s right to testify, assist, or participate in an investigation, hearing, or proceeding conducted by the EEOC. In addition, the EEOC has stated that limiting an individual’s ability to file a charge or participate in an investigation constitutes retaliation in violation of federal employment law. Any confidentiality or non-disparagement provision in a severance agreement that attempts to waive these rights is subject to challenge by the EEOC. Similarly, the Securities and Exchange Commission (“SEC”) prohibits employers from taking any action that impinges upon an employee’s ability to bring complaints to the SEC. SEC Rule 21F-17, enacted under the Dodd-Frank Act, prohibits any action that would “impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement. . .with respect to such communications.” Indeed, the SEC has fined employers for using language that prohibits employees from speaking with the SEC without prior approval from the employer. Thus, employers may not use severance agreements with departing employees that prohibit or discourage departing employees from reporting alleged violations to the SEC. It is important to include language in each severance agreement, even for employers that are not publically traded, that states that the departing employee may speak freely with federal agencies such as the SEC without first seeking approval from the employer. Aren’t there also restrictions related to settlements of claims involving sexual harassment? Yes. In response to #metoo, various states introduced or enacted legislation restricting the use of confidentiality provisions in agreements settling sexual harassment-related claims. Each piece of legislation has its own nuances regarding the types of language which are prohibited and the consequences of violating the restrictions. These are just a few of the key issues to consider when drafting a severance or settlement agreement. It is always best practice to speak with an employment attorney when drafting severance agreements to ensure compliance with federal, state, and local laws.
March 2, 2023
by Jack Sullivan and Victoria del Campo
Post-Employment Restrictive Covenants
How Important are Irreparable Injury Provisions in Non-Compete Agreements?
Today’s workforce is more mobile than in past generations. Long gone are the days when an employee started and ended a career at the same company. Knowing how to protect your company’s confidential information when a trusted employee leaves can have a lasting impact on your ability to compete. So, what can you do when a former employee goes to work for a competitor? Is having an irreparable injury provision in your non-compete agreement enough to obtain a court order prohibiting that individual from working at his/her new job? In Minnesota, courts want to see more than just words in a contract before they will grant injunctive relief against a former employee. This week, the Supreme Court of Minnesota issued a decision in St. Jude Medical, Inc. v. Carter. The case arose after Heath Carter left his employer to work for a competitor. The employer filed suit against Mr. Carter and the competitor, alleging violations of Mr. Carter’s non-compete agreement. The employer did not seek money damages but asked the court for injunctive relief; specifically, an order enforcing the terms of the non-compete agreement and prohibiting Mr. Carter from working for a competitor in his then-current position. The case went to a jury, which ultimately found that Mr. Carter had breached his non-compete agreement. But the court refused to enter an injunction, finding that the employer failed to establish that it had been harmed. The case made its way to the Supreme Court, where the question became what to do about specific language in the non-compete agreement that addressed the issue of whether and how the former employer was harmed. The language at issue is commonly included in many non-compete agreements: In the event Employee breaches the covenants contained in this Agreement, Employee recognizes that irreparable injury will result . . . that [the Employer’s] remedy at law for damages will be inadequate, and that [the Employer] shall be entitled to an injunction to restrain the continuing breach by Employee. At first glance, the provision appeared to resolve the issue of whether the employer suffered irreparable harm—Mr. Carter agreed that it had. But the Supreme Court disagreed. The court noted that “[a] private agreement is just that: private,” and concluded that such contractual language does not, by itself, entitle an employer to an injunction after proving the breach of a non-compete. The court emphasized that regardless of what the parties agree to, the burden will always fall on the employer to show that: (1) legal remedies (i.e., money damages) are inadequate; and (2) “great and irreparable injury” will result without an injunction. Because the employer did not offer proof of an irreparable injury, the court held that the employer was not entitled to an injunction. So what now? Are provisions like those quoted above meaningless? Should employers scramble to re-write their non-compete agreements? The short answer is “probably not.” Minnesota aligns with a number of states in which mere contractual language about irreparable harm is not enough to win injunctive relief. Nevertheless, these provisions are still worth including in non-compete agreements because courts can consider them as one of many factors that bear on whether an employer has suffered irreparable harm. Other factors will usually be more persuasive, often including evidence of some or all of the following: The departing employee took confidential information when he or she left (e.g., client lists, marketing plans, and pricing information). The departing employee disclosed confidential information to the competitor or put confidential information to use in the new job. The departing employee solicited business from former clients or customers and used confidential information to solicit such business. The former employer lost client or customer goodwill because of the departing employee’s breach of the non-compete agreement. Ultimately, Carter serves as a useful reminder to employers on both sides of an employee’s job change. Former employers should carefully consider how they have been harmed by an employee’s departure (and what evidence they anticipate being able to present as proof of that harm). Hiring employers should understand and reinforce to their new employees the importance of complying with prior non-compete agreements. And for employers on both sides, consulting with experienced employment attorneys even before these types of cases go to litigation can be the key to a successful outcome.
July 3, 2018
by Jack Sullivan and Trevor Brown
Post-Employment Restrictive Covenants
A Matter of Protocol -- Rules for Departing Brokers Trying to Solicit Former Clients
Question: We operate a financial services firm that employs account executives who execute investment trades on behalf of clients. One of our brokers recently resigned to move to a competitor firm. With his resignation letter, he included a list of clients he plans to solicit at his new firm. This list includes clients with whom the broker may have had some association, but it’s not clear he ever executed commission-generating trades for them. The broker signed a non-solicitation agreement with us when he started. Can we stop him from soliciting these clients at the new firm? Answer: By Dorsey & Whitney Enforcement of restrictive covenants like non-compete, non-solicit, and non-disclosure agreements is highly dependent upon the industry in which the covenant is sought to be enforced. Nowhere is that more true than in the financial services industry. As a result of an agreement initially signed a dozen years ago by a handful of the largest financial firms and now having over 1,000 firm signatories, there exists an established methodology for a financial advisor or broker to depart a firm which, if followed, protects the broker and the new firm from litigation over the departure while protecting client privacy. The methodology is found in the Protocol for Broker Recruiting, which applies only to broker moves between Protocol signatories. (The Protocol applies to “registered representatives” – we’ll use the shorthand “broker” here.) Frequently, however, brokers and firms either mistakenly or deliberately disregard the Protocol, so financial firms must remain vigilant in protecting their valuable confidential information, client relationships, and goodwill. Thus, the first necessary piece of information to answer your question is whether you and the competitor are Protocol signatories. The Protocol itself is rather simple. A broker transitioning between signatory firms may take only the following information: “client name, address, phone number, email address, and account title of the clients that they serviced while at the firm.” The broker is prohibited from taking any other information or documents. To gain protection under the Protocol, the broker must resign in writing, deliver the resignation to local branch management, and include with the resignation letter a copy of the client information that will be taken, including account numbers. The broker’s compliance with the Protocol need not be perfect – s/he need only exercise “good faith” and “substantially comply” with the requirements. The Protocol also places obligations upon the broker after leaving the prior firm, and upon the new firm. The information taken by the broker may be used only for solicitation of the former clients by the broker, and only after the broker has actually joined the firm. In other words, the broker may not start soliciting clients to move to the new firm while the broker is still engaged with the old firm (but planning to move), nor may client information be shared at the new firm for solicitation by other brokers. The Protocol also contains requirements regarding the movement of broker teams or partnerships and governing trailing commissions. Many brokers have executed agreements with firms containing terms prohibiting solicitation of customers or retention of customer lists. So long as the old and new firms are signatories to the Protocol and the broker substantially complies in good faith with its terms, the Protocol protects the broker from liability to the old firm for retaining the information identified in the Protocol or soliciting clients on behalf of the new firm. But if a broker or new firm violates the Protocol, the former firm may be in a good position to file suit and seek immediate injunctive relief barring the broker and the new firm from irreparably damaging the former firm’s business. There are several points to consider when analyzing potential legal action when the Protocol is at play. First, not all firms are Protocol members. Over 1,000 firms have joined the pact, including almost all of the major financial services companies, but many smaller brokerages are not. And those smaller brokerages frequently seek to poach successful brokers from more established signatory firms. If the new firm is not a Protocol signatory, then a broker taking client information, even under the Protocol’s methodology, could violate the broker’s non-compete or non-solicitation obligations and subject the broker and the new firm to liability. Firms should beware of the situation of a broker claiming she acted in “good faith” because she thought the new firm was a Protocol signatory. If the new firm misled the broker into that mistaken belief, liability may lie against the new firm for claims like tortious interference with contract or misappropriation of trade secrets. Second, only “good faith” compliance with the Protocol provides protection. There continue to be examples when brokers purport to comply while secretly violating the Protocol, often by stealing confidential client or firm information beyond the information disclosed with the broker’s resignation letter (e.g., detailed client account history). This theft can occur in any number of ways – emailing a personal email account, copying information to thumb drives, or simply walking out the door with confidential hard copy documents. Firms should establish best practices for when brokers depart, including review of the broker’s email activity in the months preceding the resignation. If the firm suspects wrongdoing, further investigation may be warranted, such as forensically examining the broker’s computer for electronic evidence of wrongdoing, reviewing office copy machine electronic records, or even watching building surveillance tapes. Third, and more specifically to your question, client information that permissibly may be taken covers only clients that were actually serviced by the broker at the former firm. This issue recently was litigated before a Connecticut federal court in Westport Resources Management v. DeLaura (June 23, 2016), with the broker arguing that client “service” included any efforts the firm made on behalf of the clients. In that case, the broker was employed by two related entities, and when he resigned both to move to a new firm, he included with his resignation letter clients of one entity even though the services he provided were through the other entity. The former entity sued under the broker’s non-solicit agreement. The court held that “services” under the Protocol meant “what clients pay registered representatives to do on their behalf” – in other words, something for which the broker normally would receive a commission. The court held that because the broker had not received any commissions from the entity with which the clients were associated, they were not clients that the broker serviced at that entity. Applied to your question, you may have a claim against your former broker since it sounds like he never performed work for certain clients he included with his resignation letter. Fourth, solicitation of former clients is permissible only after the broker has joined the new firm. Brokers are often tempted to start priming the pump before they depart, either secretly or overtly (and increasingly through social media) telling clients of their plans to move firms and inviting the clients to follow. This sort of pre-move solicitation is explicitly prohibited under the Protocol, is typically forbidden under non-solicitation agreements, and should be investigated by firms in the same manner described above. Fifth, the Protocol does not immunize corporate raiding, i.e., one firm targeting another firm to steal a group of employees. Raiding claims can be challenging to prove, and often rely on some evidence that the new firm used the former firm’s confidential information or trade secrets to aid in its improper recruitment, or that the new firm has undertaken a deliberate pattern of soliciting a competitor’s key employees with the purpose of damaging the competitor’s ability to compete. Firms may therefore have reason to be concerned when several brokers move to another firm, even when the competitor is a Protocol signatory. Finally, whether the Protocol is implicated or not, firms must be mindful that legal claims will be governed by applicable state or federal laws. States take a variety of approaches to enforcement of non-compete, non-solicit, and non-disclosure agreements, and both state and federal law may apply to a trade secret misappropriation claim. In addition, agreements frequently contain clauses dictating where litigation may occur and what law applies. These issues should be fully investigated before a firm decides whether to bring suit against a former broker or competitor firm.
November 4, 2016
