Non-compete Laws: District of Columbia Scott J. Wenner and Joleen Okun, Schnader Harrison Segal & Lewis LLP This Article is published by Practical Law Company on its PLCLaw Department web service at http://us.practicallaw.com/6-504-6108. A Q&A guide to non-compete law in District of Columbia. For the statutes referenced in Question 1, the essential elements are as follows: RELEVANT STATE LAW Restrictions on competition may be enforced if: 1. If non-competes in your jurisdiction are governed by statute(s) or regulation(s), identify the state statute(s) or regulation(s) governing: Non-competes in employment generally. Non-competes in employment in specific industries or professions. GENERAL STATUTE AND REGULATION GENERAL STATUTE AND REGULATION The restraint on trade is reasonable. The restraint is only what is necessary to protect the employer’s business interest. The agreement does not go against public policy. (Deutsch v. Barsky, 795 A.2d 669 (2002), citing Godfrey v. Roessle, 5 App. D.C. 299 (1895).) INDUSTRY- OR PROFESSION-SPECIFIC STATUTE AND REGULATION There is no industry- or profession-specific statute or regulation. While there is no statute that explicitly governs non-compete agreements (or non-competes), the District of Columbia (DC) Code prohibits any contract that unreasonably restrains trade (DC ENFORCEMENT Code § 28-4502). INDUSTRY- OR PROFESSION-SPECIFIC STATUTE OR REGULATION 3. If courts in your jurisdiction disfavor or generally decline to enforce non-competes, please identify and briefly describe the key cases creating relevant precedent in your jurisdiction. There is no industry- or profession-specific statute or regulation. There are no cases generally declining to enforce non-competes. 2. For each statute or regulation identified in Question 1, identify the essential elements for non-compete enforcement and any absolute barriers to enforcement identified in the statute or regulation. 4. Which party bears the burden of proof in enforcement of non-competes in your jurisdiction? Copyright © 2011 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. FMLA EmployerLaws: Non-compete Coverage District andofEmployee Columbia Eligibility Checklist REASONABLENESS OF RESTRICTIONS DC law places the burden of proof on the employer seeking to enforce the non-compete, as it must show the agreement does not unlawfully restrain trade (see Deutsch v. Barsky, 795 A.2d 669 (D.C. 2002)). 8. What constitutes sufficient consideration in your jurisdiction to support a non-compete agreement? DC courts balance the interests of the employer and employee when analyzing non-competes. Relevant factors, as discussed by the court in Deutsch include: The employer’s (or promisee’s) legitimate business interest. The nature of the hardship imposed on the employee. An offer of employment is sufficient consideration for a noncompete in DC. However, if the non-compete agreement is executed after employment begins, then some further consideration, such as a change in terms of employment, is likely necessary. The assurance of continued employment for a substantial period of time has been recognized as adequate consideration (Ellis v. James V. Hurson Associates Inc., 565 A.2d 615 (D.C. 1989)). In the Ellis case, substantial meant “approximately ten years.” 5. Are non-competes enforceable in your jurisdiction if the employer, rather than the employee, terminates the employment relationship? Although not rendering non-competes unenforceable automatically, a DC court may choose not to enforce a noncompete if the employee was terminated without good cause as a discretionary matter. For a case in which a court enforced a non-compete despite its applying equally to employees who were terminated, see Ellis v. James V. Hurson Associates Inc., 565 A.2d 615 (D.C. 1989). As with all cases in this jurisdiction, a fact-dependent inquiry determines whether the non-compete is reasonable and enforceable. 9. What constitutes a reasonable duration of a noncompete restriction in your jurisdiction? Although this inquiry is fact-specific, up to three years is often considered a reasonable duration for a non-compete restriction in DC (see Ellis v. James V. Hurson & Assocs., Inc., 565 A.2d 615 (D.C. 1989)). However, a DC court also found that three years was too restrictive where the business required manual unskilled labor and no significant trade secrets were involved (Chemical Fireproofing Corp. v. Krouse, 155 F.2d 422 (D.C. App. 1946)). 6. Do courts in your jurisdiction interpreting non-competes have the authority to modify (or blue pencil) the terms of the restrictions and enforce them as modified? In other cases, longer restrictive periods have been permitted. Some examples include: Erikson v. Hawley, 12 F.2d 491 (D.C. App. 1926). In Erikson, a ten-year restriction in a contract between an orthodontist and his apprentice was considered a reasonable duration because it was a common time period in the industry and the apprentice received as consideration the benefit of his employer’s expertise. Only one DC case authoritatively discusses the blue pencil rule (Ellis v. James V. Hurson Associates Inc., 565 A.2d 615 (D.C. 1989)). In that case, the DC Court of Appeals held that the trial court properly entered a preliminary injunction enforced only a portion of a restrictive non-compete covenant. The court did not specifically adopt a universal blue pencil rule, however, because it found that the enforceable and unenforceable terms of the covenant were severable according to the contract terms. Given the limited opportunity the courts have had to consider the rule, it is unclear whether DC courts will apply the blue pencil rule to non-compete agreements in the future. Meyer v. Wineburgh, 110 F. Supp. 957 (D.D.C. 1953). In Meyer, the court found that a five-year restriction was enforceable where the restriction was otherwise reasonable, did not create an unfair hardship and did not violate public policy. Courts may consider several factors, as discussed in Chemical Fireproofing, when determining reasonableness of a non-compete restriction including the: Type 7. Will choice of law provisions contained in noncompetes be honored by courts interpreting noncompetes in your jurisdiction? The case law is not settled on whether and when the DC courts will enforce choice-of-law provisions contained in non-competes. The DC courts have honored these provisions in non-compete agreements where they bear a substantial relationship to the parties (L.G. Balfour Co. v. McGinnis, 759 F.Supp. 840 (D.D.C. 1991) and NRM Corp. v. Hercules, Inc. 758 F.2d 676 (D.C. Cir. 1984)). Copyright © 2011 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. of business. Services provided by the employee. Position of the employee. 10. What constitutes a reasonable geographic noncompete restriction in your jurisdiction? To determine whether a geographic restriction is reasonable, DC courts look to the rule of reason, a fact intensive inquiry looking 2 at the “totality of the circumstances” (see Deutsch v. Barsky, 795 A.2d 669 (D.C. 2002)). 13. If there is any other important legal precedent in the area of non-compete enforcement in your jurisdiction not otherwise addressed in this survey, please identify and briefly describe the relevant cases. Some examples of application of the rule of reason include: Meyer v. Wineburgh, 110 F.Supp 957 (D.D.C. 1953), in which a 30- mile restriction was considered reasonable where the restriction: was otherwise reasonable; did not create an unfair hardship; and did not violate public policy. There is no other important legal precedent in this area. REMEDIES Chemical Fireproofing Corp. v. Krouse, 155 F.2d 422 (D.C. App. 1946), in which a covenant restricting solicitation of customers across a six-state region was considered to be too restrictive when coupled with a three-year time restriction. The court, however, suggested that the region was not overbroad and was enforced as part of a one year restriction on competition in the same industry. Both injunctive relief and damages may be available to employers For the factors a court may consider in this analysis, see Question 9. enforcing non-competes in DC (see Meeker v. Stuart, 188 F.Supp. 14. What remedies are available to employers enforcing non-competes? 272 (D.D.C. 1960)). 11. Does your jurisdiction regard as reasonable noncompetes that do not include geographic restrictions, but instead include other types of restrictions (such as customer lists)? 15. What must an employer show when seeking a preliminary injunction for purposes of enforcing a noncompete? To obtain a preliminary injunction under DC law, an employer Non-competes in DC may include reasonable non-geographic restrictions if they protect legitimate business interests of the employer, such as trade secrets (which may include customer lists) or goodwill. Examples include: must show that: It is likely to prevail on the merits of one of its claims. It would be irreparably harmed if the injunction is not granted. The United States Travel Agency, Inc. v. World-Wide Travel Service Corp., 235 A.2d 788 (D.C. 1967). In this case, an idea that an employee learned about while working for his former employer was not sufficiently original to rise to the level of a protected business asset. employer’s hardship without the injunction is greater than the employee’s hardship suffered from the injunction. The injunction is in the public interest. (Jacksonville Port Authority v. Adams, 556 F.2d 52 (D.C. Cir. 1977).) Ruesch v. Ruesch International Monetary Services, Inc., 479 A.2d 295 (D.C. 1984). In Ruesch, the court distinguishes between types of customer lists, holding that lists of non-route customers (where there is no particular relationship between employee and customer) are not protectable as trade secrets. However, the court notes that other customer lists may be protectable on a case-by-case basis. OTHER ISSUES 16. Apart from non-competes, what other agreements are used in your jurisdiction to protect confidential or trade secret information? These restrictions might also include preventing employees from soliciting a former employer’s customers (see Ellis v. James V. Hurson & Assocs., Inc., 565 A.2d 615 (D.C. 1989)). Nondisclosure agreements are used and are enforced under the Uniform Trade Secrets Act (DC Code § 36-401 to 410). In addition, employers may use agreements not to solicit other employees and covenants prohibiting solicitation of customers to 12. Does your jurisdiction regard as reasonable geographic restrictions (or substitutions for geographic restrictions) that are not fixed, but instead are contingent on other factors? protect confidential or trade secret information. 17. Is the doctrine of inevitable disclosure recognized in your jurisdiction? There are no examples of reasonable non-fixed geographic restrictions in DC. The doctrine of inevitable disclosure is not recognized in DC. 3 Copyright © 2011 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. Accounting for Transaction Costs and Earn-outs in M&A Practical Law Company provides practical legal know-how for law firms, law departments and law schools. Our online resources help lawyers practice efficiently, get up to speed quickly and spend more time on the work that matters most. This Checklist is just one example of the many resources Practical Law Company offers. Discover for yourself what the world’s leading law firms and law departments use to enhance their practices. Contact Us Practical Law Company 747 Third Avenue, 36th Floor New York, NY 10017 646.562.3405 plcinfo@practicallaw.com www.practicallaw.com Copyright © 2011 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. Use of PLC websites and services is subject to the Terms of Use (http://us.practicallaw.com/2-383-6690) and Privacy Policy (http://us.practicallaw.com/8-383-6692). 4 2-11