By Jerry Dancy Redmond, Esquire
A noncompete agreement is a contract between an employer and employee that prohibits an employee from engaging in a business that competes directly or indirectly with their current employer’s business during their employment and after their employment ends. Employers rely on noncompete agreements to protect their legitimate business interests, such as trade secrets, along with their investment in specialized training, proprietary methods and information, and customer goodwill developed over time. The goal is to keep sensitive business information out of competitor’s hands.
Are noncompete agreements actually enforceable?
Yes. Although a handful of state lawmakers recently enacted bans on non-competes in their states, non-competes remain enforceable in most states, particularly those that comply with the varying state standards for determining whether the noncompete is enforceable as written or should be modified by the courts. Although state standards may vary, at a minimum, most generally require that the noncompete be reasonable in duration or geographic scope and not unreasonably restrict a worker’s ability to find post-employment. Generally speaking, these agreements must protect an employer’s legitimate business interests.
Example #1: Employer A does not want to prevent employees to whom employers’ trade secrets and propriety information was not shared from obtaining post-employment, so it only has executive and key employees sign a noncompete agreement. Depending on the scope and duration of the noncompete, Employer A’s decision may comply with noncompete laws in the state(s) in which it operates and be enforceable.
Example #2: Employer B requires every employee, regardless of position or title, to sign a noncompete prohibiting employees from working or performing the same or similar services as Employer B’s services within a 550-mile radius of Employer B’s office for a period of five (5) years post-employment. Employer B’s noncompete is not reasonable in duration, geographic and employee scope, and unreasonably restricts workers’ ability to find post-employment. As a result, it likely is not enforceable, as it may not comply with noncompete laws in the state(s) in which Employer B operates.
Why are some states limiting and/or banning non-competes?
Noncompete laws are created and governed by states and each state’s noncompete laws vary regarding recognition, enforcement, and legal status. Over the past few years, state lawmakers have been updating non-compete laws, not out of malice, but rather, in an effort, to strike a balance between protecting an employer’s legitimate business’ interest and restricting or hampering employees’ freedom to pursue better opportunities and their labor and economic mobility.
To that end, eleven (11) states have placed limitations on the applicability of non-competes, they include Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, Nevada, Wisconsin, and Washington. While the limitations in these states may vary, each have a common denominator, their laws prohibit non-competes unless an employee earns above a certain salary threshold. This limitation benefits employers and employees, as it protects employers’ legitimate business interests, while not restricting employees’ labor and economic mobility.
Additionally, the seven (7) states that now ban non-competes are California, North Dakota, Minnesota, Oklahoma, Washington D.C., Michigan, and New York. These states still provide a few narrow exceptions designed to protect employers’ legitimate business interests and employees’ freedom to pursue better opportunities such as allowing non-competes related to the sale of a business, requiring employees be provided notice and time to consider the non-compete, etc.
I heard the federal government plans to enact a nationwide ban on non-competes. Is that true?
In January, the federal government, specifically, the Federal Trade Commission (FTC), announced a proposed rule which, if enacted, would amount to a near-total ban on the use of non-compete agreements with one exception—allowing non-competes by owners in connection with the sale of a business. If enacted, the federal rule would override any state statute, regulation, or order inconsistent with the provisions of the final rule unless state law provides greater worker protection.
The proposed rule originally was scheduled to take effect when the 60-day public comment period ended in April. However, given the overwhelming influx of comments received from labor unions, employee advocates, and business groups, the FTC extended the comment period until April 2024. Feedback received included concerns raised by the U.S. Chamber of Commerce, which argued the FTC lacked the authority to enact the rule under federal law and called on the Commission to withdraw the proposed rule. Currently, it is unknown whether the FTC will move forward with enacting the rule next year and/or whether it possesses the authority to do so.
Amid the pending FTC proposed rule, another federal agency, the National Labor Relations Board (NLRB), recently issued a memo stating that broad non-competes violate the National Labor Relations Act (NLRA) except in limited circumstances. The NLRB’s position enforces the NLRA, a federal law applicable to most unionized and nonunionized private-sector employers. The NLRA provides private-sector employees a variety of protections and rights which include the right to seek better working conditions and the right to designate representation without fear of retaliation. The memo states that non-competes can infringe on employees’ right to access other employment opportunities, which in turn affects their right to improve working conditions. According to NLRB, overly broad non-competes violate the NLRA and the rights of low-and middle-income workers—much like Example 2 above—unless the non-compete is narrowly tailored to protect the employer’s legitimate business interests.
Recommendations Going Forward.
Today, employers in most states remain able to use non-competes and should not hit the panic button just yet. Any FTC rule banning non-competes will not be released until late spring or summer of 2024 at the earliest. Even then, it is highly likely the rule will face significant legal challenges that could delay it from going into effect for years. However, considering the recent state limitations and/or bans on non-competes, employers should consider reviewing and evaluating the enforceability of their non-competes and whether the non-compete is narrowly tailored to justify and protect employers’ legitimate business interests, particularly if they operate in a state that has either banned or placed limitations and/or restrictions on the applicability and enforcement of non-competes.
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