Can A Sandwich Shop Enforce Noncompetes Against Employees? [e109]

Full Podcast Transcript

NASIR: All right. Welcome to our business legal podcast where we cover business legal news and add our legal twist and also answer some of your business legal questions that you, the listener, can send in to ask@legallysoundsmartbusiness.com. Welcome to the program! My name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: Matt Staub’s still sporting the beard even though I’m looking at him right now and his video is frozen so I can’t tell if he just shaved it between the lag.

MATT: I intentionally froze it. This is Episode 109 and we had Episode 107 this week. So, a week of two shows with prime numbers as the episode; this is a good Friday fact for people.

NASIR: Yeah. Actually, that’s something that everyone’s writing down right now and really cares about. One thing I like about our show is that we really talk about the issues, you know, that people are really concerned about.

MATT: Prime numbers, they’re good ones. Okay. Well, we’re actually going to talk about a topic today that I like. I think there actually is one out here in California because I looked it up before but it’s not necessarily that close. The restaurant, Jimmy John’s…

NASIR: Wait. Wait. Wait.

MATT: So, if I you’re from…

NASIR: Hold on. You like Jimmy John’s?

MATT: Oh, yeah! You don’t?

NASIR: What?

MATT: How are you from the Midwest?

NASIR: No, no, I’ve been there many times, but I think it’s one of the most overrated places.

MATT: Overrated?

NASIR: Mostly by you.

MATT: I might quit the podcast.

NASIR: I threw you off, didn’t I? Okay. Sorry, go ahead. Jimmy John’s… Go ahead.

MATT: So, Jimmy John’s, for those of you who don’t know, it’s a sandwich place. I think they have roughly 2,000 locations. I don’t know exactly. You know, their kind of thing are sandwiches that are really quick and they’re also good in my opinion. But, you know, there’s nothing that’s really that unique about them, I guess.

NASIR: Yup!

MATT: Well, their sandwiches are good. The bread’s really good. But the big things is, like, speed. There’s been many times I’ve gone there where I’ve ordered at the front and, like, by the time I walk to the cash register to pay, the sandwich has already been made. They’re huge in college towns, obviously, because that’s the prime market right there.

NASIR: Which should tell you something, but go ahead.

MATT: Wow. So against Jimmy John’s. I don’t know what to say. So, anyways, there’s a new lawsuit evolved, of course. Why else would we be talking about it? Of course, they talk about forcing employees to work off the clock like every business does so that’s nothing new but what I want to talk about here is part of their agreement deals with a non-compete – and this is for the people that make sandwiches, not the owners or anything – a non-compete agreement for the sandwich. You know, I’m sure people making roughly minimum wage. There’s a couple of restrictions, but they cannot work within 3 miles of any of the roughly 2,000 Jimmy John’s locations because they have, you know, they don’t want people leaking… Do they talk about trade secret, too? They don’t want people telling them how it’s done?

NASIR: Yeah, you can’t work at any place that does 10 percent of their business from making sandwiches and it’s connected to trade secrets. It seems like that’s what they’re worried about which makes me laugh. Like, what kind of trade secrets are there for making deli sandwiches? I mean, frankly, like you said – I’m using your own words – they don’t have anything unique about them in that respect. If you guys haven’t been there, you can compare it to Subway. I mean, I suppose that’s the closest franchise that you can compare it to.

MATT: Yeah. I mean, it’s just meat, cheese, toppings. I guess the bread I’m pretty sure they make fresh in-house. Like, they have two different kinds of bread so maybe that’s it. But, like, there’s nothing really special about any of the actual stuff on the sandwiches.

NASIR: Well, you mentioned speed. I mean, the speed aspect could be a trade secret in itself. I don’t know. I mean, if they have a certain method of making the sandwiches and so forth. That’s a big deal and I know Subway in itself has a very specific process from how many employees they have, depending upon how many people they expect, and the order of the ingredients and the order of things are very specifically designed to be as efficient as possible. Maybe Jimmy John’s has some breakthrough with that, but it seems strange, right? I mean, the attorneys for these workers says that literally the blackout area where these employees would be unable to work would be to cover of 6,000 square mile radius in over 44 states in Washington DC which, I mean, that dramatizes a little bit but kind of paints a picture as well.

MATT: I mean, as much as I like Jimmy John’s, this non-compete is definitely way too broad. It shouldn’t even be there in the first place because the problem is too – like I mentioned before – a lot of their locations are either in college towns or in places that are big for, like, post-college people to live. So, if you were to work, let’s say you quit the job because you hate it, and I’m sure a lot of people do, they go and want to work somewhere else, and they can’t work within 3 miles of any location? That’s way too broad, way too oppressive, as they state – well, oppressive, that’s their word.

NASIR: Granted it only applies to delis and submarine – selling from submarine hero type, deli style, pita in a wrapped or rolled sandwiches so whatever those are.

MATT: But 10 percent though, that’s not that big. It’s only 10 percent of the sales.

NASIR: No, it’s not that big. Yeah, but Walmart doesn’t sell that so you could work at Walmart within 3 miles. This is an example.

MATT: Uh, I’m looking at pictures of Jimmy John’s and it’s pretty good even though it’s really early.

NASIR: Are you getting hungry?

MATT: It’s way too early to eat a sandwich. I don’t know why you hate it so much.

NASIR: It’s not that I hate it. I just think people love it to death and it’s like you go there and it’s like, “Oh, yeah, it’s a sandwich shop.” You know, you can go to any house deli and get just the same, if not better.

MATT: You know, the exact same thing happened with my wife. I kept talking about it when we went somewhere and we went there and she’s like, “Yeah, there’s nothing special about this.” It’s like, “Ow.” I was like, “It’s not special necessarily.” I think, for me, it’s more of a nostalgic thing.

NASIR: It’s nostalgic, yeah.

MATT: Yeah.

NASIR: That I understand because every college town – it’s also open late, right? If I recall in one of the college towns.

MATT: Yeah, they’re open pretty late.

NASIR: It’s open late. They even have delivery so these are all things that are great, you know, in a certain time of your life – like, in college.

MATT: The best man in my wedding actually worked at one for a while so that was pretty awesome because he would shut it down.

NASIR: Did you even know him? Or you made the local Jimmy John’s guy your best man?

MATT: I gave him a lot of business – a lot of business. I like their sandwiches.

NASIR: But let’s talk about non-competes for a second. So, what’s interesting is that Jimmy John’s, like they mentioned, operate in 44 different states, including Washington DC. Now, almost every state in the United States has some restrictions for non-competes for employees and, usually, it ranges from, like, in California where they’re almost absolutely prohibited unless it’s in connection with trade secrets, but even that’s been eroded over time as well. And so, in California, Jimmy John’s would have to show that there’s actually a trade secret that they’re trying to protect and so forth which I think they’ll have trouble with. And then, it ranges from the other spectrum of that they’re tolerated so long as they’re reasonably related to legitimate business interest or there’s separate consideration sometimes that’s paid and it’s limited to geographic time, et cetera, and then everywhere in-between. In this case, if you just look at it simply, we’re talking about two years after employment and within 3 miles of a Jimmy John’s location and only within the subject matter of deli producing. In a lot of states, with non-competes, this particular clause will be enforceable, but there’s also a handful that it wouldn’t be. So, putting our interests aside, whether we like Jimmy John’s or not, this clause could be enforceable in a lot of these states.

MATT: Yeah, I mean, I’m just looking and I think they started in Illinois and I think they’re even based out of Champagne which is the University of Illinois. But, you know, in Illinois, non-competes are permitted. You know, it’s not like California where it’s pretty hard to get one through. In Illinois, it’s legitimate business interest, you know, trade secrets, confidential information.

NASIR: And I think most states are, I should say, they’re tolerated. But, at the same time, in fact, Texas, for example, I think Texas is the only state that’s actually made it even easier for non-competes to be enforceable because it used to be that it has to be reasonable and so forth, but you have to pay separate consideration. But, in the last few years, there was a court case that basically said that you don’t need separate consideration necessarily. What may be enough is, like, separate training or disclosure of trade secrets may be enough. And then, also, that it’s reasonable in the sense of the time, geographic limitations, as well as the subject matter, and that’s very case-by-case. And, also, Texas allows, if there’s enforceability issues, the court can also just narrow down, like, let’s say, instead of 3 miles, it’s 120 miles from the location. The courts can actually reduce it to 60 miles or 40 miles or 30 miles – whatever is reasonable in that particular action because, at the end of the day, they still want people to make a living to a certain extent so it can’t be extreme.

MATT: Yeah, if you look at Texas, the protectable interest, you know, trade secrets, confidential proprietary information, good will, special training which would apply here perhaps or knowledge acquired during employment which is really broad, there’s exemptions in Texas. It’s physicians in certain circumstances and then – this is weird – Jimmy John’s employees is the other exemption for the states so that’s pretty random that I’ve pulled up that one – not really.

NASIR: I think it’s very random.

MATT: All right. Well, unless there’s anything else you want to talk about that, we’ll get to our question of the day.

NASIR: No, I was just going to say that Jimmy John’s is not that good.

MATT: This is our biggest dispute since the sauce versus crust thing.

NASIR: Okay. The sauce versus crust, we have a very clear line in the sand. But, in this case, I feel as though you agree with me, but you have emotional attachment to it or something.

MATT: The sauce versus crust is A versus B. This is an overrated-underrated discussion. You think it’s overrated; I think it’s a little bit underrated.

NASIR: Oh, man. Well, let’s take another poll and then I’ll win again.

MATT: That’s fine, as long as I win sandwiches.

NASIR: We’ve got to figure out. Chris, let’s put a poll on our site whether Jimmy John’s is overrated or underrated. Let’s figure out how to do that.

MATT: I’m all for that. Yeah, we should.

NASIR: Okay. So, assuming we do that, if not, I apologize but everyone click on the link to our actual post to this podcast and you’ll find a little poll there.

MATT: I’m curious about that, yeah. We can probably do that. It shouldn’t be too difficult.

NASIR: And, one thing that you should know is that, if you’ve never been there, then you can still vote because you can just trust my judgment by understanding that Jimmy John’s is very highly, highly rated by a lot of people, but it’s not that good; therefore, overrated.
[MUSIC]

NASIR: Well, let’s get to our question of the day.

MATT: Also having to deal with restaurants. It’s a big restaurant week for us.

NASIR: Yeah.

MATT: “I own a bunch of restaurants and we are considering expansion. Is there anything from a legal standpoint that I should be considering that’s different from what I have now?” This comes from the Greater New York area.

NASIR: Nice, New York City area, I assume. So, expansion’s always interesting. I mean, there are a lot of issues. Besides the specific issues with having multiple restaurant locations, I think, when you start adding more employees, when you start thinking about the corporate structure even, whether you want to put each restaurant location to a separate entity, whether you’re going to have different ownership structures, even the employee aspect of things, you know, when you hit that 50-employee mark, you know, when you start adding locations, that can come up quick and, of course, we know, when that happens, everything from ObamaCare’s employee mandate to different discrimination laws now applying to you, it’s definitely an HR nightmare and, just because, by the way, you separate into separate entities doesn’t necessarily mean that you’re immune to these types of laws. So, that’s something to think about.

MATT: Yeah. I mean, in New York, it’s a little bit more defined. I guess New York City considers any restaurant with more than 15 locations a nationwide chain. But, in terms of a “nationwide” definition, there’s really not anything for now. The Affordable Care Act is supposed to have something that comes with an actual definition where it would be considered a chain, but that’s down the line. So, it’s pretty ambiguous in terms of what’s a chain and what’s not. This person, we don’t know a number; they’re just in New York. I mean, 15 restaurants is a lot though, wouldn’t you say? How many restaurants have 15-plus locations?

NASIR: No, you’re right. I mean, most don’t, that’s true. But this person says, “I own a bunch of restaurants and we are considering expansion.” I wonder what’s a “bunch,” right? To me, a bunch is like five or four. I don’t know. Or maybe ten even. But, yeah, in New York, once you hit that 15 mark, then they have laws specifically regarding disclosing calorie counts and so forth, and that may apply to other localities, too – that you have to start thinking about where you’re locating. You know, when you start crossing state lines, even city jurisdictions, all these things, you’re going to have to start thinking, like, the big corporations in the world where they actually determine how they’re going to enter a market based upon some of the local laws there – everything from taxes to additional regulations that may be prohibitive or inviting.

MATT: Jimmy John’s – 45th largest chain restaurant in the US, by the way.

NASIR: Wow. I didn’t realize so many people overrate it. It’s crazy.

MATT: That’s gust from, like, the perspective you just gave is good. In terms of anything from a legal standpoint, they should consider that now. It’s just more employees, more to worry about there. If you don’t have a designated HR person overlooking all the locations, probably a good idea to start getting on that.

NASIR: I think also having a lawyer that is dedicated just for this expansion project and, what I mean by that, no lawyer is going to have all the knowledge of the specific laws and regulations for each location, et cetera. You know, there’s all these legal issues whether it’s employment issues to, like I said, the disclosure of calorie counts and so forth. So, what you need is an attorney that can kind of juggle all these things and also manage other attorneys or have a law firm that have dealt with this specific issue to make sure it’s handled properly; otherwise, you’re going to have to spend a lot of research doing it all yourself. It just becomes a waste of time, frankly.

MATT: Yeah.

NASIR: Not worth your time.

MATT: So, that’s an answer. So, we’ve answered that and we’ve decided that Jimmy John’s is underrated – slightly underrated, we’ll meet in the middle.

NASIR: Slightly? No, I’m not meeting in the middle. It’s highly overrated and you’re saying now it’s slightly underrated? It kind of shows the audience how confident you are in your position – that you’ve already changed. From the last five minutes, you’ve already changed your position.

MATT: I’m double highly underrated so that’s why we’re meeting in the middle.

NASIR: All right. Well, thanks for joining us again. Don’t forget to leave some positive reviews on our website and we’ll see you again next week.

MATT: Yeah, and I think we will hit, I think next week’s episode, we’ll hit our one year of doing the podcast in terms of when our first episode came out.

NASIR: Oh, really?

MATT: I guess in-between this episode right now and when we record the next ones.

NASIR: Okay. That narrows it down.

MATT: We’ll have to figure out the exact date but we’ll sort it out.

NASIR: Very cool.

MATT: Keep it sound and keep it smart.