Last Thursday, the White House issued a report titled “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses” and an accompanying blog post. Relying heavily on a report earlier this year from the U.S. Treasury, the White House report criticizes the perceived misuse of non-competes, highlights their negative impact on the economy, and concludes that “in certain cases, non-competes can reduce the welfare of workers and hamper the efficiency of the economy as a whole by depressing wages, limiting mobility, and inhibiting innovation.” Among the interesting statistics cited in the report are
- 18 percent of U.S. workers (approximately 30 million) are currently subject to a non-compete;
- 14 percent of workers earning less than $40,000 a year are subject to a non-compete;
- Fewer than half of workers who currently have non-competes report being exposed to their employers’ trade secrets;
- 37 percent of employees subject to non-competes are asked to sign them after accepting a job offer (in other words, with no notice of the non-compete before accepting the job offer);
- Many workers who sign non-competes do not understand their legal effects;
- 90 percent of workers with non-competes did not negotiate the terms; and
- Workers in states with lower levels of non-compete enforcement on average have higher wages.
Although the report acknowledges the benefits of non-competes, it challenges their primary justification: the protection of trade secrets. Specifically, the report notes that many workers who sign non-competes are unlikely to ever be exposed to their employers’ “true” trade secrets and suggests that the protection of trade secrets therefore does not justify the need for non-competes in most circumstances. In whole, the report identifies seven areas of concern where non-competes disadvantage workers:
- Workers who are unlikely to possess trade secrets are nonetheless compelled to sign non-competes;
- Workers are asked to sign non-competes only after accepting job offers, when they have already declined other offers and thus have less leverage to bargain;
- Non-competes, their implications, and their enforceability are often unclear to workers;
- Employers often write non-compete agreements that are overly broad or unenforceable;
- Employers requiring non-competes often do not provide “consideration” that is above and beyond continued employment;
- Non-competes can prevent workers from finding new employment even after being fired without cause; and,
- In some industries, non-competes can have a detrimental effect on health and well-being by restricting consumer choice.
The report then highlights how certain states have addressed these concerns, such as restricting the enforceability of non-competes for employees under a certain income (Oregon), requiring non-competes to be offered and disclosed before a worker accepts a job offer (Oregon and New Hampshire); voiding or “red penciling” non-competes whose restrictions are overly broad as drafted (Nebraska, Virginia, and Wisconsin); prohibiting the enforcement of non-competes against workers fired without cause (Montana and New York); and limiting non-competes for certain professions like healthcare (Delaware, Illinois, Tennessee, Texas, and Massachusetts).
Today President Obama signed into law the Defend Trade Secrets Act, which would allow companies to bring civil actions for trade secret theft under the federal Economic Espionage Act. We will have a comprehensive client bulletin on the DTSA imminently. In the meantime, if you have any questions, please contact any member of our Unfair Competition and Trade Secrets Practice Group. UPDATE (May 12, 2016): Our comprehensive client bulletin on the DTSA is out!
Finally, the report states that the White House will begin working with the Treasury Department and the Department of Labor to “facilitate discussion” on the role of non-competes among experts in labor law, economics, government, and business. The stated goal of these discussions is to “identify key areas where implementation and enforcement of non-competes may present issues, to examine promising practices in states, and put forward a set of best practices and call to action for state reform.”
Although the specter of non-compete legislation at the federal level is concerning, the report emphasizes that reform must come from the states: “Ultimately, most of the power is in the hands of State legislators and policymakers in their ability to adopt institutional reforms that promote the use and enforcement of non-competes in instances that appropriately weigh their costs and benefits and in ways that provide workers appropriate levels of transparency about their rights.”
Will there be a national law limiting the use of non-competes? Not likely. But the report highlights some legitimate concerns with the use of non-competes and challenges states to narrowly restrict their enforcement. Thus, expect to see heated debates, increased lobbying efforts, and proposed legislation restricting the use of non-competes in your state capital soon. If nothing else, this is a reminder that location matters in non-compete enforcement, so now is a good time to analyze any choice-of-law provisions in your company’s existing non-compete agreements.