Some employers require all, or most, of their employees to sign a non-competition agreement, rationalizing that even if not enforceable, at least the non-competition agreement will make the employee “think twice” before leaving, especially to a competitor. This practice has come under attack recently as anti-competitive.
Last week, for example, the Illinois Legislature passed a statute, the Illinois Freedom to Work Act, that appears to prohibit Illinois employers from requiring non-competition agreements for employees earning less than $13.00/hour. This legislative action follows recent enforcement actions by the Illinois and New York attorneys general against Jimmy Johns’ use of non-competition agreements with “sandwich artists” and delivery drivers.
The Illinois attorney general filed a lawsuit alleging that Jimmy Johns use of non-competition agreements with these low wage earners violated the Illinois Consumer Fraud and Deceptive Business Practices Act. Similarly, in 2014, the New York attorney general began an investigation into Jimmy Johns’ use of non-compete agreements with low wage earners and recently reached a settlement. Jimmy Johns agreed to discontinue providing such agreements to franchisees and agreed to notify franchisees that the New York attorney general regards such agreements with low wage earners as illegal.
As most employers know, in actions to enforce non-compete agreements, courts must evaluate not only the parties’ intent and the meaning of the essential elements of an agreement. Courts also must consider the public policy issues at play. In judicial decisions across the country, even in those decisions enforcing restrictive covenants, courts express concern about the public policy implications of interfering with an employee’s ability to earn a living and with corresponding wage suppression when the “free market” of a mobile labor force is stifled. As a result of such concerns, courts will routinely refuse to enforce a non-compete agreement, even if the “intent” of the parties to be bound by the agreement is clear and/or if the employer fails to show a true need for protection from “unfair” competition from this individual once the employment relationship has ended. The need to protect confidential information or customer goodwill is often regarded as sufficient to merit such protection. But if the employee was not in a position to have access to confidential information or to develop goodwill with customers, the loss of which could have a significant impact on the business, then the court will often not enforce the agreement.
The recent actions by the Illinois legislature and Illinois and New York attorneys general are a wakeup call for counsel and their clients who may be prone to simply cast the non-compete agreement net as widely as possible with the assumption that, at worst, the agreements may either be narrowed by a court. More courts are recognizing, and are disturbed by, the intimidating effect these agreements have upon employees who may be unwilling to take the risk (and spend the necessary resources) to challenge the potentially overbroad non-compete. Even setting aside the risk of enforcement actions from state attorneys general, employers can hamper their ability to enforce legitimately crafted and required non-competition agreements by requiring the agreements from employees from whom they do not truly need protection from unfair competition.
The negative impact on possible enforcement comes not only from the courts’ heightened awareness of public policy concerns. It also comes from a practical impact. An employer may determine not to pursue litigation against an employee whose position and subsequent work for a competitor, while a breach of the agreement, is not threatening to the employer’s legitimate protectable interest. But later, if the employer seeks to enforce the non-compete agreement against a former employee whose position and subsequent competition do justify such enforcement, the court will most certainly be informed that the employer has permitted others to breach without consequence. The employer’s enforcement action will be at risk due to the employer’s arguable bad faith in requiring employees to agree to restrictive covenants when no protection was truly needed and due to the employer’s inequitable selective enforcement.
An employer would be wise to evaluate, in light of these circumstances, whether it is requiring non-competition agreements from employees who present no real threat to the employer. Now, more than ever, employers must be intentional and judicious with respect to which employees are required to sign non-competition agreements.