The White House has entered the fray regarding employer use of non-compete agreements. While the Obama administration's recently issued "State Call to Action on Non-Compete Agreements" does not change current law applicable to employee non-competes (which are governed by state law), the call to action further signals the administration's efforts to eliminate perceived impediments to stronger wage growth. While a newly elected Trump administration likely means that little will come of this initiative at the federal level, how states choose to respond to this call to action remains to be seen.
The call to action seeks to enlist the support of state governments to combat the use of employee non-competes, or to at least minimize the costs it believes are associated with their use. Specifically, the call to action says that states should consider:
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banning non-competes altogether;
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banning non-competes for certain categories of workers (e.g., low wage workers, workers who were fired);
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improving transparency and fairness in non-competes (e.g., requiring employers to give employees advance notice of the non-compete requirement and/or requiring employers to give employees additional consideration in order to enter into a non-compete); and/or
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eliminating the "blue pencil" doctrine and voiding agreements with unlawful non-competes rather than rewriting them.
While non-compete agreements are—with few exceptions—unlawful and unenforceable in states such as California, Oklahoma, and North Dakota, other states may soon take steps to reform the laws governing non-competes in their states. Specifically, Connecticut, Hawaii, Illinois, New York, and Utah have announced their support of the call to action.
In addition, the call to action is consistent with the proactive measures some states have taken with respect to non-competes. For example, the New York State Office of the Attorney General (NYSAG) has entered into settlements with at least three employers who were using overly broad non-compete agreements. While announcing one of these settlements, the NYSAG encouraged workers who believe they are signed up to illegal non-competes to bring complaints to the NYSAG and explained: "Non-compete agreements for low-wage workers are unconscionable. They limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued. Companies should stop using these agreements for minimum wage employees."
Further, for employment agreements entered into after January 1, 2017, California employers must comply with newly enacted Labor Code Section 925, which will make it more difficult for employers to use choice of law and venue provisions to evade California's prohibition on non-competes. The new law generally prohibits employers from requiring employees who live and work primarily in California to adjudicate claims arising in California outside of the state. In addition, it prohibits California employers from depriving employees of the substantive protection of California law for controversies arising in California. Essentially, this means that California employers must allow California employees to litigate or arbitrate their disputes in California under California law. Significantly, the law appears to apply only to contracts that are entered into as a condition of employment (such as a confidentiality or inventions assignment agreement signed at the outset of employment), and the law does not apply to such contractual provisions agreed to by the parties where an employee is actually represented by legal counsel in connection with the contract's negotiation.
As noted, the recent election results and what many assume will be the new Trump administration's anti-government regulation bias suggest that the call to action may not gain traction. Nevertheless, increasing state law initiatives and increased judicial scrutiny of restrictive covenants suggest that employers using non-competes should consider whether any changes to their current non-competes or related practices are warranted. Specifically:
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Employers in states that permit the use of employee non-competes should take steps to ensure that their non-competes are "reasonable" under applicable state law, which generally means not being overly restrictive in terms of geography, time, or scope.
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Employers may wish to consider whether their use of non-competes should be restricted to a narrower band of employees (e.g., management or executive-level employees only, or only employees with access to sensitive company information only).
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Employers should ensure that their non-compete agreements comply with new Labor Code Section 925.
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Employers should avoid agreeing with another company to refuse to solicit or hire that other company's employees, or agreeing not to compete "too aggressively" for employees, as the Department of Justice and Federal Trade Commission's recently released "Antitrust Guidance for Human Resources (HR) Professionals," warns against such activity, stating: "[a]n individual likely is breaking the antitrust laws if he or she:...agrees with individual(s) at another company to refuse to solicit or hire that other company's employees."
While reviewing employment agreements that may contain employee non-competes, employers should ensure that agreements entered into after January 1, 2017, comply with new Labor Code Section 925. They should also make any other changes that are appropriate in light of other legal developments (including the SEC's recent actions regarding whistleblower protections, the newly enacted Defend Trade Secrets Act, and developments in the law of class action waivers).
