Mergers & Acquisitions 2022 Annual Review

8 MORRISON FOERSTER In 2022, legislatures continued to narrow the permissible scope of employee non-competition agreements, at least outside the context of the sale of a business, while courts enforced them, albeit with increasing scrutiny. Dealmakers will need to review the scope of a target company’s non-competes, including those in existence prior to a transaction as well as those entered into in connection with a transaction, and consider whether other protections, such as an NDA or other long-term employment incentives, may be necessary or appropriate. ■ Lawmakers Limit Non-Competes. Colorado, the District of Columbia, and Illinois are among the jurisdictions that narrowed the reach of non-competes for employees during 2022. For example, Colorado, among other things, now bars non-competes for employees earning less than $101,250 and requires employers to give a non- competition agreement to an employee before starting employment or, for current employees, at least 14 days before going into effect. ■ Each of these jurisdictions will apply its law to a non-compete entered into by an employee who lives or works in the jurisdiction, regardless of any choice of law provision to the contrary. Non-competes entered into in exchange for the sale of a business continue to be enforceable in each of these jurisdictions despite these new laws. 3 ■ FTC Proposes Ban on Employee Non-Competes . The FTC started the new year by proposing a new rule that would impose a general ban on employee non-competes as an unfair method of competition. The FTC is taking public comment, including on various alternatives short of a complete ban. As currently proposed, the ban would not apply to non-competes in the context of the sale of a business by a “substantial” (i.e., at least 25%) owner, member, or partner. 4 ■ Delaware Chancery Court Refuses to Enforce or Blue-Pencil Overbroad Deal Non-Compete. The Delaware Chancery Court struck down a sale of business non-compete that barred the seller from competing not only with the business it sold, but also the buyer’s other businesses. 5 The court also declined to blue-pencil the non-compete to an enforceable scope. ■ California Courts Enforce Sale of Business Non-Compete Against Seller Tied to Termination of Employment (Not Closing Date). Ten years ago, a California appellate court refused to enforce a sale of business non-compete that defined the duration as the longer of X years from closing or Y years from the seller’s termination of employment. In 2022, however, two California state and federal court judges enforced sale of business non-competes where the seller was barred from competing with the buyer for Y years from the seller’s termination of employment. 6 ■ Courts Provide More Clarity on California Labor Code Section 925(e)’s Potential Application to Silicon Valley and Other California Non- Competes. California Labor Code Section 925 requires any 2. EMPLOYEE NON-COMPETES: POLITICIANS LIMIT AND COURTS ENFORCE WITH INCREASING SCRUTINY