Laws in the United Kingdom and United States are increasingly taking a more restrictive view on the permitted scope of exclusivity and noncompete clauses.
PROPOSED CHANGES TO UK AND US LAWS
On December 4, 2020, the UK government launched a consultation on measures to extend the ban on exclusivity clauses and to reform post-termination noncompete clauses. Numerous states in the United States already have limiting provisions governing post-termination restrictions including in relation to noncompete clauses, and Washington, DC, will soon join this list when a new law takes effect potentially as early as March 2021.
CURRENT APPROACH IN CALIFORNIA
California has banned post-employment noncompete agreements in most circumstances. Generally, noncompete agreements are unenforceable except where an employee uses prior confidences and this confidential information surfaces naturally, thereby allowing the previous employer to establish that a breach of confidentiality did take place.
Accordingly, agreements entered into between employers, who are competitors in the same sector, not to compete for the other party’s employees (“no poaching” agreements) have also been challenged under US antitrust law as restrictions of competition, including with criminal prosecutions.
The rationale for a restrictive approach in California is multifaceted and includes enabling mobility in the workforce, protecting individual freedoms, and allowing people to move into positions that more accurately reflect their potential value.
EXTENDING THE CALIFORNIA APPROACH
The approach adopted in California is increasingly being reflected in other US states and in the UK proposals.
Alongside California, several states including Colorado, North Dakota, Oklahoma, and Oregon prohibit or strictly limit noncompete clauses and Washington, DC, will soon adopt this view too.
Meanwhile, while the UK government’s consultation primarily focuses on restriction of the use of noncompete clauses, it also asks for views on whether measures should be introduced to restrict the use of other post-termination restrictive covenants, such as nonsolicitation, nondealing, no-poaching, and goodwill protection clauses.
IMPACT ON ANTITRUST ENFORCEMENT
If the California experience is extended to other US states and the United Kingdom, and employers do not take appropriate compliance measures, this could lead to more enforcement against no-poaching agreements, possibly including information exchange between employers in relation to restrictions on the mobility of employees. The new US administration has made this area a focus for antitrust enforcement, and there has now been a criminal prosecution as well as cases involving subsidiaries of international companies. So far there has been little focus on no poaching as a distinct area of antitrust enforcement in the United Kingdom, but this could change if employers respond to changes in employment law regarding noncompetes by entering into no-poaching agreements.
PRACTICAL STEPS COMPANIES CAN TAKE
Companies need to manage risks associated with legal changes in the restrictive covenants sphere. In particular, employers should ensure confidentiality and intellectual property clauses and notice period and garden leave provisions are drafted robustly and provide sufficient protection for the business.
Clients also need to ensure a unified approach on human resources (HR) and antitrust issues is established to effectively manage risks and ensure that their business teams do not enter into no-poaching agreements or engage in potentially risky information exchange. Morgan Lewis’s integrated HR and antitrust teams are available to assist clients in implementing these changes.