On June 13, 2024, the Rhode Island House passed, and the state Senate passed in concurrence, a bill to amend the Rhode Island Noncompetition Agreement Act (Senate Bill 2024-S 2436A/2024-H 8059A), which would ban and void existing and future post-employment noncompetition and customer nonsolicitation covenants with virtually all employees.
The existing Rhode Island Noncompetition Agreement Act, which went into effect in 2019, already prohibits noncompetition agreements with nonexempt and "low-wage employees," undergraduate and graduate students and employees age 18 or younger. The new bill would significantly expand that ban to include all employees, except in limited circumstances, and render all prohibited noncompetition agreements "null and void" and a "violation of public policy."
When Does the Law Take Effect?
With overwhelming approval from the state Legislature, the bill was transmitted to Governor Daniel McKee on June 20, 2024, and now awaits his signature for its passage into law. If Governor McKee signs the bill, it will be returned to Secretary of State Gregg Amore, who will then notify the Senate of the bill's passage into law effective immediately. If Governor McKee fails to sign the bill by June 28, 2024, it will automatically become law.
Governor McKee may also veto the bill, which would return it to the Senate. If three-fifths of the present members of both the Rhode Island House and Senate then vote in approval of the bill, it will become law regardless of Governor McKee's veto. Governor McKee has only vetoed eight bills since assuming office in 2021.
Who Is Covered by the Bill?
The bill applies to virtually all public, private and nonprofit employers and employees. "Employee" includes "an individual who works for hire, including an individual employed in a supervisory, managerial, or confidential position," but doesnotinclude independent contractors.
Which Types of Agreements Are Covered?
The bill applies to an existing or future noncompetition agreement with an employee, which means:
- "[A]n agreement not to compete with a specific business or entity," including an agreement under which the employee agrees not to engage in certain specified activities competitive with the employer after the employment relationship has ended; or
- A "forfeiture for competition agreement" that imposes "adverse financial consequence on a former employee" if the employee engages in competition.
The bill eliminates certain exceptions to the definition of a "noncompetition agreement" under the existing statute. Under the existing statute, covenants not to solicit or transact business with the employer's customers, clients or vendors―so-called customer nonsolicitation covenants―are excluded from the definition of noncompetition agreements. The bill deletes that exception. As a result, it appears that the bill also effectively bans and voids customer nonsolicitation covenants under the guise that these covenants fall within the definition of prohibited noncompetition agreements.
Are There Any Exceptions to the Bill?
The bill excludes various types of agreements from the definition of a prohibited "noncompetition agreement," including:
- Certain other standard employee covenants, including:
- Covenants not to solicit or hire employees of the employer;
- Nondisclosure or confidentiality agreements, including agreements not to share trade secrets, customer lists (including the names, addresses and identities of customers) or future business plans; and
- Invention assignment agreements;
- Noncompetition agreements made by a significant owner, member or partner of a business entity who will receive significant consideration or benefit in connection with the sale of a business entity or all or substantially all of the operating assets of a business entity, or a disposition of an ownership interest of a business entity, partners, division or subsidiary;
- Noncompetition agreements originating outside of an employment relationship;
- Forfeiture agreements not tied to whether the former employee competes;
- An agreement that the employee will not reapply for employment to the same employer following termination; and
- Noncompetition agreements made by financial institutions subject to Title V of the Gramm-Leach-Bliley Act.
In addition, a noncompetition agreement entered into "pursuant to an agreement to sell a business or entity or an equity interest in a business...may be enforceable" if it is "reasonable in scope, time-frame and application."
As set forth above, the bill eliminates the existing exception for covenants not to solicit or transact business with the employer's customers, clients or vendors. The bill also eliminates the exception for certain noncompetition agreements made at the time of separation.
Can the Bill Be Circumvented by Applying Another State's Law Under Contract?
Although the bill is silent on whether an employer can contract to apply the law or forum of another state, it reflects a "public policy" of Rhode Island.
What Are the Consequences if an Employer Violates the Bill?
Although the bill renders violative noncompetition provisions null and void and unenforceable against an employee, it does not affect the remainder of a contract or agreement containing the unenforceable noncompetition agreement or provision.
The bill does not specify any civil enforcement mechanisms for employees or impose financial penalties for a violation.
Does the Bill Grant and/or Limit Any Rights of Employers?
The bill adds a new Section 28-59-4 to the existing statute, which grants employers the right to bring a civil action against any employee who: (a) violates an agreement described in section 28-59-3(d) of the statute; and (b) discloses or wrongfully utilizes trade secrets. Section 28-59-3(d) of the statute gives employers the right to enter into an agreement with an employee:
[N]ot to share any information, including after the employee is no longer employed by the employer, regarding the employer or the employment that is a trade secret, customer lists, including the names, addresses, identities of customers, or future business plans.
Under existing Rhode Island law, employers already have the right to bring civil actions against employees who violate lawful agreements. Thus, it appears that new Section 28-59-4 may be construed to limit the circumstances under which employers may bring a civil action against employees to those circumstances described in this new section of the statute,i.e., circumstances where an employee both violates an agreement described in Section 28-59-3(d)anddiscloses or wrongfully utilizes trade secrets. An employer successfully bringing such an action may be awarded injunctive relief, compensatory damages, punitive damages and attorneys' fees and costs.
What This Means for Employers
If the bill becomes law, companies with Rhode Island-based employees should quickly engage counsel to reevaluate their current and prospective restrictive covenant agreements and exit procedures.
For More Information
If you have any questions about this Alert, please contact Shannon Hampton Sutherland, Lawrence H. Pockers, Miranda S. Bovit, any of the attorneys in our Non-Compete and Trade Secrets Group, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
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