Are non-competes going the way of the carrier pigeon? Is the federal hands-off on non-competes coming to an end?
There is no currently no federal statute or rule determining the enforceability of a non-compete provision or agreement, which is determined by state law. There is no bright line rule, and courts view each non-compete on a case by case basis according to the particular facts therein. Duration, geography, and scope are the prime considerations to determine whether a non-compete is narrowly tailored and therefore enforceable.
As everyone likely knows, the Defend Trade Secrets Act was passed by the House and the Senate, and it now awaits the President’s signature. The Act creates a federal cause of action that allows employers to go straight to federal court to pursue relief for a misappropriation of their trade secrets.
Perhaps not coincidentally, at around the same time that the Act was passed by Congress, the White House released a report entitled “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses.” Unsurprisingly, the Report, like the recent report put out by the U.S. Treasury Office of Economic Policy, is critical of “the problematic usage of one institutional factor that has the potential to hold back wages—non-compete agreements.”
The Report defines non-competes as “contracts that ban workers at a certain company from going to work for a competing employer within a certain period of time after leaving a job.” And in a preface, it states that “This brief delineates issues regarding misuse of non-compete agreements and describes a sampling of state laws and legislation to address the potentially high costs of unnecessary non-competes to workers and the economy.”
Employment people should read this Report carefully!
Is the sky falling for employers? No!
However, the combined effect of these reports may be to amplify the general trend seen in state courts and legislatures to narrow the enforcement of non-competes.
Does this mean we are heading towards a federal law on non-competes also? Probably not, but the Report may portend upcoming unfavorable rulings for employers. After all, former employees have to earn a living.
Non-competes are a blunt tool for protecting trade secrets and confidential information, and, as the Report notes, they may have many unintended consequences like stifling innovation and economic growth.
Employers will soon be able to rely upon the increased protections of the Defend Trade Secrets Act. And they may still rely upon non-solicitation agreements to protect their customers, employees, vendors, etc. from solicitation by former employees. These tools are more tailored towards employers’ goals of protecting their businesses.
What should employers do if they want to keep using non-compete agreements?
Stop using form agreements. No one form could possibly be narrowly tailored and reasonable when applied to all employees in all states in which the employer does business.
Think carefully about what exactly is the goal of the non-compete. Simply keeping employees from working for competitors isn’t by itself a legitimate protectable interest. Does that employee have access to the company’s confidential information? If not, why is she being restrained with a non-compete? Consider whether a non-solicitation provision and confidentiality agreement would be sufficient.
If a non-compete is required, draft the restriction narrowly with regard to timing and geography. Don’t have a two year restriction when a six-month one would do. Don’t extend the non-compete to the entire U.S. when the company only operates in the Northeast.
Have a lawyer who practices in the area of restrictive covenants draft the non-compete with the help of a business person informed about the company’s business.
Finally, you’ll see that the Report has a good recitation of which states will “blue pencil” or “red pencil” an agreement, i.e., where a court may re-write a contract to make it equitable and enforce it and where the court is more likely to throw out the entire non-compete provision due to an overly broad factor.
It’s worth a very close read.