Be it enacted by the Senate and the House of Representatives in General Assembly convened:
Section 1. (NEW) (a) For purposes of this section:
(1) "Person" has the meaning given in section 1-1(k).
(2) "Employer" means any person who has employees, excluding the state or any political subdivision of the state.
(3) "Employee" has the meaning given in section 46a-51(9).
(4) "Noncompete agreement" means any agreement between an employer and employee under which the employee agrees that the employee shall not compete with the employer in providing products, processes or services that are similar to the employer's products, processes or services in any geographic area or for any period of time after termination of employment.
(2) The definition excludes the state or any political subdivision of the state. Section 1-84b of the Connecticut General Statutes governs employment restrictions on former state employees.
(3) This definition tracks that of section 46a-51(9) of chapter 814c, Human Rights and Opportunities..
(4) This definition is taken from Oregon's noncompete statute.
(b) A noncompete agreement is enforceable if it is reasonable. In determining whether the agreement is reasonable, the court shall consider:
(1) the length of time the restriction operates;
(2) the geographic area covered;
(3) the fairness of the protection accorded to the employer;
(4) the extent of the restraint on the employee's opportunity to pursue his occupation; and
(5) the extent of interference with the public's interests.
Subsection (b) codifies the common law. The language, with modification, is taken from Scott v. General Iron and Welding Company, 171 Conn. 132. 136-137 (1976) and Trans-Clean Corp. v. Terrell, 1998 WL 142436 (Conn. Super 1998).
(c) No noncompete agreement is enforceable unless entered into:
(1) At the time the employee accepted employment, provided that, at or before the time the employer offered employment, the employer (i) notified the employee in writing that employment was contingent on signing a noncompete agreement and (ii) gave the employee a written copy of the noncompete agreement to be signed;
(2) at the time the employee accepted a bona fide advancement with the employer, provided that, at or before the time the employer offered the advancement, the employer (i) notified the employee in writing that the advancement was contingent on signing a noncompete agreement and (ii) gave the employee a written copy of the noncompete agreement to be signed; or
(3) at the time of a substantial change in circumstances of the employer, including without limitation, the sale of all or substantially all of the employer's assets, the employer's acceptance of significant financing from a third party or the employer's entering into a partnership, joint venture or other such business arrangement with another person, provided that, before the time the employer completed such change in circumstances, the employer (i) notified the employee in writing that continued employment was contingent on signing a noncompete agreement and (ii) gave the employee a written copy of the noncompete agreement to be signed.
(1) The intent here is to provide that, even though the agreement may be signed at the time the employee accepts employment, notice that the employee must sign a noncompete agreement, along with a written copy of the agreement, must be given to the employee earlier. The employee then has an opportunity to factor that information into his decision to accept or refuse the employment offer. Oregon's statute, e.g., only requires that the agreement be signed at the time of employment. However, if the person has already quit his present job and is then required to sign an agreement, without prior warning, the signing is nevertheless coercive.
(2) This subdivision tracks the language in subdivision (1). The "bona fide advancement" language comes from the Oregon statute.
(3) At the time an employer sustains a significant change in its financing, ownership or structure, e.g., it may be required by a third party to sign, or have its existing employees sign, a noncompete agreement. In such event, the employer does not have an opportunity to disclose the agreement to its employees prior to their accepting employment, as they are already employed. In recognition of appropriate business reasons for an employer's entering into these kinds of arrangements, this subdivision permits noncompete agreements to be signed post-employment under such circumstances, provided the employee has some advance notice that he will be required to sign the agreement.
The subsection is drafted somewhat broadly in an effort to afford the employer, to the greatest extent possible, freedom to conduct its business according to its best judgment, without being overly burdened. The employee is protected, in all three subdivisions, by receiving notification, prior to any change in his current position, that the employer requires the employee to sign a noncompete agreement. In addition, the committee believed it preferable to allow for interpretation of the provisions by courts through application to specific circumstances. For example, the committee opted not to include a minimum time period, after an employee has received notice of a noncompete agreement, in which to decide to sign the agreement or reject the employment offer. The committee preferred to leave it to the courts to determine whether an employee had sufficient time to consider his options, based on the facts of the case before it.
Finally, the disclosure required by the subdivisions is disclosure only of the terms of the noncompete agreement, not of the terms of any third party discussions or agreements in which the employer is involved, which may be the subject of third party nondisclosure provisions.
No noncompete agreement is enforceable if the employer terminates the employee's employment, unless the termination was for the employee's wilful misconduct in the course of his employment or for just cause, as those terms are defined in subsection (a) of section 31-236.
No noncompete agreement is enforceable if the employer terminates the employee's employment under circumstances that would entitle the employee to receive unemployment benefits.
No noncompete agreement is enforceable if the employer terminates the employee's employment in violation of state or federal law or public policy.
No noncompete agreement is enforceable if the employer terminates the employee's employment for other than just cause.
The committee members were concerned about employees who are terminated by their employers and then prevented from obtaining subsequent employment in their field by the existence of a noncompete agreement.
At the same time, the committee wanted employers to have appropriate discretion to terminate employees for business reasons other than for the wilful misconduct of the employee or for just cause, as defined in section 31-236, and still receive the benefit of the noncompete agreement signed by the employee. One example might be where the employer is suffering economic hardship and lays off one or more employees. Under such circumstances, the issue may be not only the best interests of the employer, but of the remaining employees and perhaps the public as well. The interests of all may be best served by prohibiting the exiting employees from competing with the employer while the employer attempts to recover financial strength.
The four proposed versions of the subsection are attempts to address these concerns. There was no majority view among the committee on this issue. Therefore, all versions are included in this report to allow the legislature to consider them for possible inclusion in a proposed bill.
Version 1: This version makes noncompete agreements unenforceable if an employer terminates the employee, other than for wilful misconduct or just cause. "Wilful misconduct" and "just cause" are reasons under Connecticut's Unemployment Compensation law for denying unemployment benefits.
Version 2: This version is essentially the same as version 1, but expressed differently.
The policy of both versions 1 and 2 is that, if an employees employment is terminated for reasons other than the employees own misconduct, the employee should not then be prevented from seeking alternative employment in the same field, even with a competitor of the former employer, in which he has been working. Thus the focus in on the misconduct of the employee, absent which the employee should be free to seek other employment.
Version 3: This version does not invalidate all noncompete agreements upon the employer's termination of an employee, but only where the employer has acted inappropriately in the termination.
Connecticut law presently allows employers wide discretion in terminating at-will employees. However, courts have recognized a limitation to that discretion where the termination violates the law or contravenes public policy. In Sheets v. Teddy's Frosted Foods, Inc., 179 Conn. 471, 476 (1980), the court found that "public policy imposes some limits on unbridled discretion to terminate the employment of someone hired at will." This version of the subsection provides that, only where a termination is deemed wrongful as a violation of public policy, would the accompanying noncompete agreement be unenforceable against the employee.
Version 4: "Just cause" is not currently required for a termination of an at-will employee to be deemed rightful and made in good faith. Magnan v. Anaconda Industries, Inc., 193 Conn. 558 (1984). This proposed subsection imposes a standard of just cause for a termination in order for a noncompete agreement to be enforceable against the terminated employee. Thus, although the termination itself might be upheld, the accompanying noncompete agreement would be unenforceable unless the termination was for just cause.
The standard of just cause here is not the same as that referenced in version 1, and as defined in section 31-236. That section defines "just cause" as: "a single act of wilful misconduct in the course of an individual's employment which seriously endangers the life, safety or property of his employer, fellow employees or the general public." Although the term is not defined in the Anaconda line of cases, a fair reading of them indicates that a termination for just cause as contemplated by those cases may be for reasons less egregious than endangerment of life, safety or property.
(e) In any action to determine the enforceability of a noncompete agreement, each party to the action shall be responsible for its own court costs, including attorney's fees, except that the court may, in its discretion, award costs and attorneys fees to the prevailing party, notwithstanding any provision to the contrary in the noncompete agreement.
This section makes each party responsible for its own costs of bringing or defending an action involving a noncompete agreement. The intent is to ease the burden somewhat on an employee wishing to contest or defend against enforcement of a noncompete agreement, particularly where the agreement provides that the employer be awarded costs if it prevails. In addition, employers seeking to enforce agreements against former employees may limit themselves only to those involving employees who they expect to have significant, adverse impacts on their businesses, because employers may no longer recover their attorneys fees and costs from the employee. The section does however retain the court's discretion to award fees to the prevailing party where appropriate. This provision may not be altered by the agreement itself.
(f) Nothing in this section restricts the right of an employer to protect trade secrets or proprietary information in accordance with other applicable law.
The subsection makes clear that nothing in the proposed section affects present law concerning trade secrets or proprietary information.
(g) Nothing in this section shall prohibit or render void any agreement between an employer and employee agreed to by the employer and its employees collective bargaining representative.
This language tracks that in section 31-51r(c). The subsection preserves the rights of parties to enter into agreements about employment and post-employment matters through the collective bargaining process.
Sec. 2. This act shall apply to noncompete agreements signed on or after its effective date.
Sec 3. This act shall be effective as of _________.
STATEMENT OF PURPOSE: To clarify the application of noncompete agreements.