Jimmy John’s can’t seem to escape the limelight. Last year, the company made headlines (discussed here) when employees hit it with a putative class action lawsuit seeking to invalidate their non-compete agreements. The District Court determined that the employees did not have standing to pursue their claims, and never reached the issue of whether the non-competes were valid. Just last month, the Illinois Attorney General filed suit against Jimmy John’s over the same non-compete agreements.
According to the AG’s complaint, Jimmy John’s requires its low-wage workers to enter into non-compete agreements as part of its standard onboarding process. These agreements prohibit employees, for two years following the termination of their employment with Jimmy John’s, from working in any capacity for another employer that: (1) derives at least 10% of its revenue from the sale of “submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches”; and (2) is located within two miles of any Jimmy John’s store in the United States.
According to the AG, by requiring employees to sign the non-competes without a legitimate business reason and without narrowly tailoring them, Jimmy John’s has engaged in unfair conduct in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (the “Act”). The AG also claims that she has “common law authority to pursue actions in parens patriae” to “preserve the economic well-being of Illinois residents and business impacted by [Jimmy John’s] unlawful conduct.” The AG alleges that Jimmy John’s use of the non-compete agreements hurts Illinois residents and businesses by limiting the pool of available workers, potentially subjecting businesses to litigation, hindering the upward mobility of workers, and suppressing wages.
While the Illinois AG’s suit appears to be the first of its kind, it is in line with a growing governmental interest in employee mobility issues. In March 2016, the U.S. Department of Treasury issued a report that addressed the possible negative impact of non-compete agreements on employee bargaining power and wages, the related “spillover” effect this may have on the economy, and the “chilling effect” that deliberately overbroad non-compete clauses may have on confused workers. Later in May 2016, the White House issued its own report, which noted that noncompetition clauses may depress wages, limit employee mobility, and inhibit innovation. In June 2016, two U.S. senators proposed the Mobility and Opportunity for Vulnerable Employees Act, which, if enacted, would prohibit the use of non-compete agreements for employees earning less than $15 per hour, less than $31,200 per year, or the applicable minimum wage. Going forward, we will not be surprised if other state officials consider actions similar to the Illinois AG’s against Jimmy John’s.
Undoubtedly, noncompetition clauses can serve employers and employees well (in jurisdictions where they are permissible). For example, they can be used to protect trade secrets and promote innovation, and can increase employers’ incentives to provide costly training. However, they should not be used to confuse employees or put the brakes on employee departures. Given the current climate of increased governmental involvement and growing scrutiny of non-competes, practitioners and businesses alike should review their use and scope. They should also steer clear of “one size fits all” agreements.