Executive Summary: On October 25, 2016, the Obama Administration issued a “State Call to Action on Non-Compete Agreements.” This call to action is part of President Obama’s Executive Order directing states to increase competition for workers and consumers. This “Call to Action” can be reviewed here.
The Obama Administration reported that non-compete agreements impact approximately 30 million U.S. workers and that it believes that there is a gross overuse of non-compete agreements. The Administration suggests that states follow California, Oklahoma, and North Dakota in passing laws that curtail the use of non-compete agreements.
The call to action urges state lawmakers to pass best practice policy objectives which include:
- Banning non-compete clauses for certain categories of workers such as health and safety and those employees who are laid off or terminated without cause.
- Requiring additional consideration to support a non-compete agreement.
- Adopting a “red pencil” doctrine to void the entire contract if one provision is overbroad.
These Obama Administration “best practices” are contrary to the current laws in many states. For example, the lawmakers in Georgia and Florida have passed legislation that provides employers considerable business protections, does not require additional consideration, and encourages judges to revise any overbroad provision so that it is enforceable (referred to as the “blue pencil” doctrine).
The Obama Administration’s recommended “best practices” will significantly limit an employer’s ability to protect its legitimate business interests, such as confidential, proprietary and trade secret information, and customer relationships.
Recommendation for Employers: While the Obama Administration is promoting its “best practices” for state lawmakers to limit non-compete enforcement, we suggest the following best practices for employers:
- Review non-compete agreements to ensure compliance with current state laws. All employers should understand the state laws where they operate related to (i) consideration, (ii) requirements for limiting the scope, time, and territory of a non-compete, and (iii) the state’s policy on the “blue pencil” doctrine. All non-compete agreements should have severability language allowing a court to reform or strike an overbroad restriction and enforce the remainder of the agreement.
- Ensure you are taking full advantage of the protections offered in many states. Laws regarding the enforceability of non-compete agreements are different in each state. Employers must understand the importance of choice of law provisions and choice of forum provisions that should be in all non-compete agreements. Many employers designate a state law that is not as favorable as other states that may be applicable to the employment relationship.
- Ensure that non-disclosure of confidential information provisions are specifically drafted to protect the employer’s most valuable information.
- Ensure that the agreement appropriately protects intellectual property, such as inventions, patents, copyrights, and trademarks.
- Draft standard letters to send to employees upon their separation from employment reminding them of their obligations under the non-compete agreement and asking for confirmation that they will comply.
- Draft standard letters to send to competitors who hire your employees to inform them of the employees’ continuing legal obligations under the non-compete agreement.
- Confirm that applicants have disclosed any non-compete restrictions with their prior employers. Fully assess any non-compete restrictions prior to making an offer of employment or make the offer conditional on the employment not violating any non-compete agreement.