State-By-State Smackdown XLVIII
If you’re a regular reader of Suits By Suits, you know that we think state law regarding the interpretation and enforceability of non-compete clauses is rapidly changing, driven in large part by recent appellate decisions in California that effectively renders most non-compete clauses unenforceable in that state.
Last month, we kept you apprised of a new law that passed the state legislature in Connecticut; that law, Connecticut Public Act No. 13-309, would have required employers who are acquired by or merged into another company and who require their employees to accept a non-compete clause as a condition of continued employment to provide those employees with a copy of the agreement and at least 7 days’ notice to evaluate whether or not to sign the agreement.
Notably, the final bill passed by the legislature was substantially cut down from its original form, which would have altered the common-law standard (the “Legitimate Business Interests” test or LBI) Connecticut courts use in evaluating whether or not such clauses are enforceable. The amended bill made no changes to Connecticut’s legal standard; as such, we predicted that the law would do “very little to alter the landscape.”
That prediction turned out to be quite the understatement, as Connecticut’s Gov. Dannel P. Malloy vetoed the bill by returning it to the legislature without his signature.
Gov. Malloy’s articulated reason for vetoing the proposed legislation is that “the bill leaves certain key terms undefined or unclear,” which he argues “has the potential to produce legal uncertainty in the event of merger or acquisition.” The implication is that such uncertainty would increase the risks of litigation on both sides; Gov. Malloy accordingly requested that in the next session, the legislature return with “greater clarity” for the benefit of both employers and employees.
How the legislature will respond is anyone’s guess, but it’s worth pointing out that the current common law standard governing the enforceability of noncompete clauses in Connecticut – which the governor called “robust” in his veto statement – is itself a somewhat ambiguous balancing test (LBI) that requires a court to evaluate numerous factors, including a clause’s (1) duration, (2) geographical scope, (3) protection of the employer, (4) restraint on the employee’s right to pursue work, and (5) interference with the public interest. See Robert S. Weiss & Assocs v. Wiederlight, 208 Conn. 525 (1988). Obviously a “reasonable” duration is less defined than a specific term (say, six months, as is being considered in neighboring Massachusetts).
Might Gov. Malloy’s veto and admonition encourage the Connecticut Judiciary Committee – which previously approved a bill that would have changed the Weiss common-law standard by a vote of 44-0 – to revisit that state’s long-standing use of the LBI balancing test to evaluate the validity of noncompetes? We’ll be watching.