Report Title:

Employment covenants and agreements

Description:

Voids restrictive covenants or agreements between employees and employers in cases where the employee is or will be engaged in or employed by a technology business.

 

 

 

HOUSE OF REPRESENTATIVES

H.B. NO.

2641

TWENTY-FIRST LEGISLATURE, 2002

  

STATE OF HAWAII

  

 

A BILL FOR AN ACT

 

RELATING TO RESTRICTIVE EMPLOYMENT COVENANTS OR AGREEMENTS.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The legislature finds that there is a need to: (1) Retain Hawaii’s entrepreneurs and technology workers

who would otherwise be forced to leave Hawaii to continue their professions;

(2) Encourage technology start-up and spin-off business formation;

(3) Stimulate the Hawaii economy by preserving and providing jobs for technology employees;

(4) Allow employment mobility for technology workers within Hawaii;

(5) Provide a better work environment for technology employees by encouraging employers to provide job enrichment and job satisfaction to retain their employees;

(6) Support creativity and motivation to grow the technology industry; and

(7) Promote technology spin-off companies from non-compete states to relocate to Hawaii.

In the technology industry, a restrictive covenant not to compete with a former employer imposes an undue hardship on many employees and start-up businesses. Technology employees are usually highly-specialized to perform specific jobs within their profession. Subjecting these employees to a non-compete agreement within Hawaii for a specific amount of time will restrict their employment opportunities within the State and will force them to find jobs outside of Hawaii in order to survive financially.

Moreover, employees with innovative ideas are bound to their current employer and are prohibited from exploring their ideas by starting their own businesses. This non-compete atmosphere also forces spin-offs of existing technology companies to choose other states to do business, hinders innovation, and creates a restrictive work environment for technology employees in Hawaii. As a consequence, the Hawaii economy suffers since technically skilled workers, entrepreneurs, and businesses are forced to leave the State or abandon their entrepreneurial goals.

With the adoption of the Uniform Trade Secrets Act, employer’s trade secrets are protected under the current law. In the case of Technicolor, Inc. v. Traeger, 57 Haw. 113, 551 P.2d 163 (1976), the Hawaii Supreme Court allowed for the enforceability of non-compete covenants and agreements in Hawaii.

However, the legislature finds that the benefit of a non-compete agreement to the former employer imposes undue hardship to technology employees and the Hawaii economy in general. The injury to the public outweighs the benefit to the former employer or business.

Therefore, the purpose of this Act is to make void and unenforceable non-compete covenants or agreements between employees and employers where the employee is, or will be engaged in or employed by, a technology business.

SECTION 2. Section 480-4, Hawaii Revised Statutes, is amended to read as follows:

"§480-4 Combinations in restraint of trade, price-fixing and limitation of production prohibited. (a) Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce in the State, or in any section of this State is illegal.

(b) Without limiting the generality of the foregoing no person, exclusive of members of a single business entity consisting of a sole proprietorship, partnership, trust, or corporation, shall agree, combine, or conspire with any other person or persons, or enter into, become a member of, or participate in, any understanding, arrangement, pool, or trust, to do, directly or indirectly, any of the following acts, in the State or any section of the State:

    1. Fix, control, or maintain, the price of any commodity;
    2. Limit, control, or discontinue, the production, manufacture, or sale of any commodity for the purpose or with the result of fixing, controlling or maintaining its price;
    3. Fix, control, or maintain, any standard of quality of any commodity for the purpose or with the result of fixing, controlling, or maintaining its price;
    4. Refuse to deal with any other person or persons for the purpose of effecting any of the acts described in (1) to (3) of this subsection.

(c) Notwithstanding the foregoing subsection (b) and without limiting the application of the foregoing subsection (a), it shall be lawful for a person to enter into any of the following restrictive covenants or agreements ancillary to a legitimate purpose not violative of this chapter, unless the effect thereof may be substantially to lessen competition or to tend to create a monopoly in any line of commerce in any section of the State:

    1. A covenant or agreement by the transferor of a business not to compete within a reasonable area and within a reasonable period of time in connection with the sale of the business;
    2. A covenant or agreement between partners not to compete with the partnership within a reasonable area and for a reasonable period of time upon the withdrawal of a partner from the partnership;
    3. A covenant or agreement of the lessee to be restricted in the use of the leased premises to certain business or agricultural uses, or covenant or agreement of the lessee to be restricted in the use of the leased premises to certain business uses and of the lessor to be restricted in the use of premises reasonably proximate to any such leased premises to certain business uses; or
    4. A covenant or agreement by an employee or agent not to use the trade secrets of the employer or principal in competition with the employee's or agent's employer or principal, during the term of the agency or thereafter, or after the termination of employment, within such time as may be reasonably necessary for the protection of the employer or principal, without imposing undue hardship on the employee or agent.

(d) Subsection (c)(4) shall not apply to a covenant, agreement, or ancillary restrictive covenant or agreement, which is similar, related, or subordinate to another agreement or valid transaction, by an employee or agent not to compete with the employee’s or agent’s employer or principal during the term of employment or agency or after the termination of that employment or agency where the employee or agent is or will be engaged in or employed by a technology business. These agreements, covenants, and ancillary restrictive covenants or agreements shall be void, unenforceable, and treated as unlawful under subsections (a) and (b).

(e) Subsection (d) shall apply to:

(1) All written and binding restrictive covenants, agreements, and ancillary restrictive covenants or agreements not to compete entered into after June 30, 2002; and

(2) All amendments to existing written and binding restrictive covenants or agreements, and ancillary restrictive covenants or agreements not to compete created prior to July 1, 2002."

(f) As used in this section:

"Technology business" means a trade or business the principal business activity of which involves one or more of the following: software development, biotechnology, physical sciences, sensor technologies, optical technologies, ocean sciences, astronomy, or non-fossil fuel energy-related technologies.

"Principal business activity" means the activity from which a trade or business derives its largest percentage of gross receipts or, if the gross receipts do not exceed the cost incurred for that activity, costs incurred.

SECTION 3. New statutory material is underscored.

SECTION 4. This Act shall take effect upon its approval

INTRODUCED BY:

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