Fresh off of signing the Defend Trade Secrets Act, the White House released a report yesterday entitled “Non-Compete Reform: A Policymaker’s Guide to State Policies,” which contains information on state policies related to the enforcement of non-compete agreements. Additionally, the White House issued a “Call to Action” that encourages state legislators to adopt policies to reduce the misuse of non-compete agreements and recommends certain reforms to state law books.
The “Non-Compete Reform: A Policymaker’s Guide to State Policies,” which relied heavily on Seyfarth Shaw’s “50 State Desktop Reference: What Employers Need to Know About Non-Compete and Trade Secrets Law,” suggests that non-compete clauses have recently become more widespread, impacting 18% of all workers and 15% of employees without a college degree. The report analyzes the various states that have enacted statutes governing the enforcement of non-compete agreements and the ways in which those statutes address aspects of non-compete enforceability, including durational limitations; occupation-specific exemptions; wage thresholds; “garden leave;” enforcement doctrines; and prior notice requirements.
With those issues in mind, the Call to Action encourages state policymakers to pursue three “best-practice policy objectives:”
- Ban non-competes for categories of workers, including workers under a certain wage threshold; workers in occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or workers who may suffer adverse impacts from non-competes, such as workers terminated without cause.
- Improve transparency and fairness of non-competes by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted; providing consideration over and above continued employment; or encouraging employers to better inform workers about the law in their state and the existence on non-competes in contracts and how they work.
- Incentivize employers to write enforceable contracts, and encourage the elimination of unenforceable provisions by, for example, promotion of the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.
While some large employers have already publicly embraced the Call to Action, even reform-minded employers are likely to be wary of some of these proposals. For example, broad prohibitions against non-competes for workers under a certain wage threshold could threaten the many small start-ups where employee salaries tend to be lower than established businesses, but where those employees have access to highly confidential information and trade secrets. Start-ups need room to innovate at lower cost, but they still need to protect their R&D and IP from competitors, and non-competes can be an effective tool in accomplishing that goal.
Moreover, a ban on non-competes for all workers that are laid off loses sight of the purpose of the non-compete: to prevent employees with valuable competitive information from joining a competitor and using that information to compete against their former employers. Instead of using a broad brush to exempt all laid off employees from non-competes, many employers would prefer to see legislative reform focused instead on whether the employee has information worthy of protection and the appropriate duration of the non-compete to protect against disclosure of the information.
Lastly, while incentivizing narrowly tailored (and thus, enforceable) non-competes should be a goal of all employers, promoting the use of the “red pencil doctrine” may be a bridge too far. Many employers embed non-compete provisions in broader agreements that contain otherwise enforceable non-disclosure or non-solicitation agreements. Striking the entire agreement in these instances would unnecessarily harm business interests and the innovation economy. Instead, many employers would rather see state legislators leave these issues up to the courts by allowing judges to use gentler options such as the “blue pencil doctrine,” which allows the court to strike only the overbroad provisions while keeping the rest of the agreement intact. Another option is the reformation doctrine, which empowers judges to narrow overbroad restrictions while maintain the agreement’s enforceability.
It remains to be seen whether state legislatures will answer the White House’s call for action on non-compete reform. In the meantime, we will keep our readers up-to-date on any developments.