Employee Non-Compete Agreement and Enforceability Memo — Hawaii

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HAWAII Employee Non-Compete Agreement and Enforceability Memo

Quick-Reference Summary

Part A — Enforceability Memo

TO: [Hiring Manager / General Counsel]
FROM: [Drafting Attorney]
RE: Enforceability of Proposed Non-Compete — Hawaii Employee
DATE: [__/__/____]

1. Threshold — Is the Employer a "Technology Business"?

HRS § 480-4(d) BANS any noncompete clause or employee-nonsolicit clause in any employment contract for an employee of a "technology business" entered on or after July 1, 2015.

"Technology business" means: a business that derives the majority of its gross income from sale or license of products or services resulting from (a) software development, or (b) information technology development. The statute excludes the broadcast industry and telecommunications carriers.

If the answer is yes (and the company is not excluded), no noncompete or employee-nonsolicit clause may be used. Customer non-solicits are unsettled under § 480-4(d) — conservative drafting avoids them for tech employees.

2. Non-Tech Employers — Antitrust Exception Analysis (HRS § 480-4(c))

For non-tech employers, restrictive covenants are an antitrust exception under HRS § 480-4(c):

3. Ancillarity Test — Prudential Locations v. Gagnon (2022)

The Hawaii Supreme Court in Prudential Locations, LLC v. Gagnon, 151 Haw. 153, 509 P.3d 1099 (2022), voided a 1-year non-compete and employee-nonsolicit because the agreement was not "ancillary to a legitimate purpose not violative of HRS Chapter 480." Key takeaways:

4. Reasonableness Factors

5. Blue-Pencil / Reformation

Hawaii courts may modify overbroad covenants, but recent practice (Prudential Locations) shows willingness to void rather than reform. Draft conservatively.

6. Sale-of-Business Covenants (HRS § 480-4(c)(1))

Sale-of-business non-competes are most reliably enforced. Standard practice:

• Duration: 3–5 years (sometimes longer for goodwill protection);
• Geography: areas where business was actively conducted;
• Scope: line of business sold.

The FTC Non-Compete Rule (now vacated) also expressly permitted sale-of-business covenants for parties owning ≥ 25%.

7. Consideration

8. Remedies

• Injunctive relief available; bond at court's discretion.
• Liquidated damages enforceable if reasonable (Am. Elec. Co. v. Parsons RCI, 90 F. Supp. 3d 1079 (D. Haw. 2015)).
• Trade-secret claims independently actionable under Hawaii UTSA, HRS § 482B.
• Attorneys' fees recoverable if contractually provided.

9. Recent Developments

• Prudential Locations v. Gagnon (2022) — Hawaii Supreme Court tightened ancillarity requirement.
• Act 158 (2015) — banned tech non-competes; no expansion to other industries enacted (HB 1090, 2025, would have broadened the ban but did not pass).
• Ryan LLC v. FTC (N.D. Tex. Aug. 20, 2024) — FTC Non-Compete Rule vacated.

Part B — Non-Compete Agreement

THIS EMPLOYEE NON-COMPETE AGREEMENT (this "Agreement") is entered into as of [__/__/____] (the "Effective Date"),

by and between:

EMPLOYER:
Name: [________________________________]
Address: [________________________________]
City, State of Hawaii [ZIP]: [________________________________]
(the "Company")

and

EMPLOYEE:
Name: [________________________________]
Address: [________________________________]
City, State of Hawaii [ZIP]: [________________________________]
(the "Employee")

RECITALS

WHEREAS, the Company is engaged in the business of [________________________________] in the State of Hawaiʻi (the "Business");

WHEREAS, the Company has invested in confidential information, customer goodwill, and specialized training that constitute legitimate protectable interests under HRS § 480-4(c) and Prudential Locations, LLC v. Gagnon, 151 Haw. 153 (2022);

WHEREAS, this Agreement is intended to be ancillary to the legitimate employment relationship between the Parties and not a freestanding restraint of trade;

NOW, THEREFORE, the Parties agree:

1. INDUSTRY CARVE-OUT — HAWAII TECHNOLOGY BUSINESS BAN

1.1 Technology-Business Determination. Company ☐ IS / ☐ IS NOT a "technology business" within the meaning of HRS § 480-4(d), i.e., a business deriving the majority of its gross income from sale or license of products or services resulting from software development or information technology development (excluding broadcast and telecommunications carriers).

1.2 Tech-Business Ban. If Company is a technology business AND this Agreement is entered on or after July 1, 2015:

(a) Section 5 (Non-Compete) is VOID and UNENFORCEABLE per HRS § 480-4(d);

(b) Section 7 (Non-Solicit of Employees) is VOID and UNENFORCEABLE per HRS § 480-4(d);

(c) Sections 4 (Confidential Information), 6 (Customer Non-Solicit — limited; see § 6.1) and trade-secret protections REMAIN enforceable independently.

1.3 Severability of Void Provisions. Voidness under § 480-4(d) does not affect the enforceability of confidentiality, trade-secret, IP-assignment, or other lawful provisions.

2. ANCILLARITY ACKNOWLEDGMENT — PRUDENTIAL LOCATIONS v. GAGNON

The Parties expressly acknowledge that this Agreement is ancillary to a legitimate employment relationship in which Employee will have material access to the Company's [☐ trade secrets] [☐ confidential customer information] [☐ specialized training] [☐ proprietary methods], and is not a freestanding restraint of trade. The covenants in Sections 5–7 are tailored to protect those specific interests.

3. DEFINITIONS

3.1 "Confidential Information" means non-public proprietary or trade-secret information of the Company, consistent with the Hawaii Uniform Trade Secrets Act, HRS § 482B-1 et seq., and the federal Defend Trade Secrets Act, 18 U.S.C. § 1836.

3.2 "Customer" means any person or entity that was a customer of the Company at any time during the [____]-month period preceding Employee's termination, or any prospective customer with whom Employee had material contact during the same period.

3.3 "Restricted Territory" means:

☐ Option A — Hawaii Islands: the islands of: [______________________] [list specific islands; given Hawaii's geographic isolation, statewide restrictions face heightened scrutiny];

☐ Option B — Service Area: the geographic area in which Employee provided services or had material customer contact during the final [____] months of employment;

☐ Option C — Radius: a [____]-mile radius from each Company office at which Employee worked.

3.4 "Restricted Period" means [____] months following termination (typically 12 months; up to 24 months with strong record).

3.5 "Competing Business" means a person or entity providing products or services substantially similar to or competitive with the Business.

4. CONFIDENTIAL INFORMATION

Employee shall not use or disclose Confidential Information except as authorized or required by law. DTSA notice (18 U.S.C. § 1833(b)): Trade-secret disclosure in confidence to a government official or attorney solely to report or investigate suspected illegal activity, or in a sealed court filing, is immunized.

5. NON-COMPETE [STRIKE IF EMPLOYEE OF TECHNOLOGY BUSINESS]

During the Restricted Period and within the Restricted Territory, Employee shall not, directly or indirectly:

(a) own, manage, operate, or be employed by a Competing Business in a role substantially similar to Employee's role with the Company; or

(b) provide services to a Competing Business that involve use of the Company's Confidential Information.

This Section is intended to comply with HRS § 480-4(c)(3) and the ancillarity test of Prudential Locations v. Gagnon.

6. NON-SOLICITATION OF CUSTOMERS

6.1 During the Restricted Period, Employee shall not, on behalf of a Competing Business, solicit or accept business from any Customer.

Tech-employer note: HRS § 480-4(d) does not clearly address customer non-solicits. Conservative practice is to omit or substantially limit customer-non-solicit clauses for technology-business employees, or limit to direct solicitation of Customers with whom Employee personally worked.

7. NON-SOLICITATION OF EMPLOYEES [STRIKE IF EMPLOYEE OF TECHNOLOGY BUSINESS]

During the Restricted Period, Employee shall not solicit, recruit, or induce any employee of the Company to terminate their employment.

8. INJUNCTIVE RELIEF

Employee acknowledges that breach of Sections 4–7 may cause irreparable harm. The Company may seek temporary, preliminary, and permanent injunctive relief.

9. LIQUIDATED DAMAGES

In the event of breach, Employee shall pay liquidated damages of $[____], which the Parties agree is reasonable in light of (a) anticipated harm at the time of contracting and (b) the difficulty of proving actual loss. Per Am. Elec. Co. v. Parsons RCI, 90 F. Supp. 3d 1079 (D. Haw. 2015), this amount is not a penalty.

10. REFORMATION

The Parties authorize any court to modify any unreasonable provision to the maximum extent enforceable under Hawaii law.

11. CHOICE OF LAW / VENUE

This Agreement is governed by Hawaii law. Exclusive venue lies in the Circuit Court of the [First/Second/Third/Fifth] Circuit, State of Hawaiʻi, or the U.S. District Court for the District of Hawaiʻi.

12. ENTIRE AGREEMENT / COUNTERPARTS

Entire agreement. May be executed in counterparts and by electronic signature pursuant to the Hawaii Uniform Electronic Transactions Act, HRS § 489E-1 et seq.

EXECUTION

Part C — Pre-Signing Checklist

☐ Determined whether Company is a "technology business" under HRS § 480-4(d) (majority of gross income from software/IT)

☐ If technology business: STRUCK Sections 5 (Non-Compete) and 7 (Employee Non-Solicit)

☐ If technology business: limited or omitted Section 6 (Customer Non-Solicit) — unsettled under § 480-4(d)

☐ Ancillarity test satisfied — covenant tied to legitimate employment with access to trade secrets / customer goodwill / training (Prudential Locations v. Gagnon)

☐ Duration reasonable (typically ≤ 1 year; up to 2 years with strong record)

☐ Geographic scope tailored to employer's market AND employee's territory (Hawaii's island geography requires especially careful scoping)

☐ Scope limited to competitive activities, not all employment

☐ Legitimate business interest documented

☐ Consideration documented (at-hire offer; mid-employment additional; or severance)

☐ Confidentiality / NDA included (Hawaii UTSA § 482B; HRS § 480-4(c)(4))

☐ DTSA whistleblower notice included (18 U.S.C. § 1833(b))

☐ Liquidated damages amount reasonable; not a penalty

☐ Reformation clause included

☐ Hawaii choice of law and Hawaii venue

☐ E-signature / counterpart language (HRS § 489E)

☐ Sale-of-business covenant (if applicable) drafted under HRS § 480-4(c)(1) for stronger enforceability

☐ Reviewed by Hawaii-licensed attorney before execution

☐ Removed all <!-- GUIDANCE --> comments before delivery

Sources and References

• HRS § 480-4: https://law.justia.com/codes/hawaii/title-26/chapter-480/section-480-4/
• HRS § 480-4 (FindLaw): https://codes.findlaw.com/hi/division-2-business/hi-rev-st-sect-480-4/
• Act 158, 2015 Hawaii Session Laws (HB 1090): http://www.capitol.hawaii.gov/session2015/bills/HB1090_CD1_.htm
• Prudential Locations, LLC v. Gagnon, 151 Haw. 153, 509 P.3d 1099 (2022): https://www.courts.state.hi.us/wp-content/uploads/2022/02/SCWC-16-0000890.pdf
• Technicolor, Inc. v. Traeger, 57 Haw. 113, 551 P.2d 163 (1976)
• UARCO Inc. v. Lam, 18 F. Supp. 2d 1116 (D. Haw. 1998)
• Am. Elec. Co., LLC v. Parsons RCI, Inc., 90 F. Supp. 3d 1079 (D. Haw. 2015)
• Hawaii Uniform Trade Secrets Act, HRS § 482B-1 et seq.
• Hawaii Uniform Electronic Transactions Act, HRS § 489E
• Seyfarth Shaw — Hawaii Tech Non-Compete Ban: https://www.seyfarth.com/news-insights/hawaii-bans-non-compete-and-non-solicit-agreements-with-technology-workers.html
• Starn O'Toole Marcus & Fisher — Non-Compete Agreements in Hawaii: https://www.starnlaw.com/news/non-compete-agreements-in-the-sale-of-a-business-in-hawaii/
• Defend Trade Secrets Act, 18 U.S.C. § 1836; whistleblower immunity, 18 U.S.C. § 1833(b)
• Ryan LLC v. FTC, No. 3:24-CV-00986-E (N.D. Tex. Aug. 20, 2024) (FTC Non-Compete Rule vacated)