“I‘m in Competition with Myself and Losing.” – Roger Waters

Agreements restricting employees’ ability to compete against their employers are commonplace in the American workplace. They serve as an effective means by which employers can protect their legitimate business interests in, among other things, their customer relationships, their trade secrets and intellectual property as well as their investment in the training and education they often provide employees.

In most states, courts will enforce a restrictive covenant which is narrowly drafted to protect the employer’s legitimate business interests. However, non-compete agreements have come under attack recently. In New York, a legal news publisher recently settled litigation with the New York Attorney General by agreeing not to enforce non-compete agreements with reporters and certain other editorial employees (the argument being that the employer could have no legitimate business interest to protect by enforcing restrictive covenants against employees in those positions). In Florida, an appellate court recently held that referral sources are not business interests which can be protected with a non-compete agreement. Several states have enacted legislation restricting the enforceable scope of non-compete agreements including Hawaii (banning the agreements in technology jobs), New Mexico (banning restrictive covenants in health care jobs), Oregon (imposing an 18 month limitation on non-compete agreements) and Utah (limiting restrictive covenants to one year in duration).

In May, the White House issued an analysis of non-compete agreements which, while acknowledging the usefulness of non-competes, focused on the adverse impact these restrictions have on employees and potentially on the economy.

The White House report identifies several arguments in favor of imposing limitations on non-compete agreements due to the belief that such agreements impose undue burdens on employees and employers because, as the report asserts, such agreements restrict access to talent, discourage innovation and entrepreneurship by making it difficult for employees to start their own businesses, and restrict wage growth due to lack of employee mobility. The White House report also identifies a number of areas in which employees may be disadvantaged by these agreements including the belief that:

  1. many workers who do not have access to trade secret information must sign non-compete agreements;
  2. workers often are unable to negotiate the terms of non-compete agreements especially since such agreements are often presented after the employee has accepted a job offer;
  3. many employees do not understand the effect of such agreements;
  4. employers often draft restrictive covenants which are overbroad and difficult to understand;
  5. companies often do not provide consideration beyond continued employment in return for the employees’ promises not to compete;
  6. restrictive covenants can be enforced, in some instances, even if an employee is terminated without cause; and
  7. non-compete agreements may adversely impact free trade and consumer choice, for example, with respect to access to health care services.

The White House is committed to continuing to examine the impact of non-compete agreements on workers and the economy and has pledged to work with the states to identify and develop proposals for policy reform in an effort to balance the needs of employers, employees, the public and the economy.

So what’s the take away? Employers who use non-compete agreements should from time to time re-examine their policies regarding the use of such agreements. They should identify what legitimate business interests they reasonably need to protect, evaluate which of their employees should be subject to such agreements and ensure that the restrictive covenants are properly tailored to afford the company the ability to protect its legitimate business interests.