In today’s competitive business environment, companies strive to protect their confidential information, client relationships, and workflows through restrictive covenants. Non-compete agreements are a form of restrictive covenants as they are an added limitation to contracts and are common in many employment agreements.[1] Non-compete agreements are when the employee agrees that they will refrain from competition with the employer for a specific period and within a particular area.[2]
These covenants often pose as protection for employer data and time spent training from unfair competition.[3] The enforceability of restrictive covenants vary per state; however, as non-compete agreements partially restrain trade, courts struggle to balance such restraints against the benefits of a free market economy.[4] Accordingly, recent trends show that courts have indicated a greater willingness to refuse covenants due to the concern that they may limit mobility and innovation and increase the chances of employer abuse.[5] This article will highlight the current state of non-compete agreements and their function in employer contracts, the recent trend towards prohibiting these agreements, and key judicial and legislative efforts that have already restricted non-competes.
I. Current State of Non-Compete Agreements
Employment agreements typically include some form of restrictive covenants against the employee.[6] Notably, most noncompete agreements favor employers.[7] While many states have begun placing strict restrictions on non-compete agreements, some states that remain to enforce them use a reasonableness standard when deciding on its legality.[8] The test states that noncompete agreements are enforceable only to the extent that they are “reasonably necessary to protect narrowly defined and well-recognized employer interests.”[9] Noncompete agreements can help employers protect their confidential information if passed under this reasonableness standard.[10] Courts have upheld noncompete agreements in cases where employees working closely with patented products, in, for example, the tech industry, leave to work at companies with a similar customer base.[11] Courts have held in these cases that generally, the public interest is served by enforcing contractual obligations, including those made by consenting parties with reasonable non-compete agreements.[12]
II. Arguments Against Non-Compete Agreements
However, in response to growing concerns over employee rights and the free market economy, some states have begun prohibiting employers from enforcing non-compete agreements or severely limiting the agreements employers may enforce as a matter of public policy.[13] Arguments against the enforcing non-compete agreements include deterrence of employee mobility, suppression of innovation, and potential employer abuse.[14]
Concerns highlight the tension between the value of an employee’s creative services and a firm’s ability to acquire and protect its knowledge-based property and business goodwill.[15] Due to this, courts and legislators have struggled to balance between protecting fair competition and employee mobility and the need to protect legitimate business interests that could be compromised by the conversion of valuable information that has been invested in the employee.[16] Recent trends show a heightened judicial scrutiny for non-compete agreements, which can be seen through efforts by courts to limit protectable business interests and through legislators through efforts to tighten restrictions on non-compete agreements.[17]
III. Legislative Efforts to Restrict Non-Compete Agreements
Recently, NLRB’s General Counsel, Jennifer Abruzzo, spoke out against enforcing non-compete agreements in her memorandum titled Non-Compete Agreements that Violate the National Labor Relations Act.[18] In the memorandum, Abruzzo urges the National Labor Relations Board to make laws declaring the enforcement of employee non-compete agreements unlawful under the National Labor Relations Act.[19] Further, Abruzzo states that she already authorized the issuance of complaints alleging the unlawful maintenance of non-compete provisions and will continue to promote similar complaints.[20] This illustrates the push for protecting employee rights by suppressing non-compete agreements that state legislation has put into action.
For example, the New York State Senate recently approved two bills regarding non-compete agreements.[21] The first bill would ban post-employment non-competes between employers and employees.[22] The second bill prohibits employers from entering into non-compete agreements with employees unless there is a “good faith basis” to believe that a non-compete agreement would be enforceable.[23] Prior to becoming law, these bills still need to pass the New York State Assembly and receive approval from Governor Kathy Hochul; however, they stand to further exemplify the legislative push to restrict non-compete agreements.[24]
Employers need to stay updated on the evolving landscape of non-compete agreements and local legislative changes to protect their confidential information. Reckless execution of non-compete agreements can pose a risk to employers’ proprietary data. However, there are ways for employers to safeguard their information by implementing additional safety precautions when hiring. Conducting background inspections on prospective employees is essential to verify that new hires are not bound by restrictive covenants with their previous employers.[25] Moreover, having employees sign written agreements confirming their freedom from any prior non-compete agreements can prevent disputes with past employers.[26] Restrictive covenants, like other contracts, should be supported by sufficient consideration to ensure enforceability.[27] Finally, employers should thoroughly review state legislation prior to drafting or implementing restrictive covenants to ensure they are complying with state laws. By following these measures, employers can navigate the complexities of non-compete agreements while protecting their business interests.
Recent trends surrounding the use of restrictive covenants point towards further restrictions for employers to use to protect their assets. With growing concerns over employee rights and the need for a more competitive job market, many states are limiting the scope and enforceability of these agreements. The shift toward stricter regulations aims to strike a balance between protecting legitimate business interests and ensuring employees have the freedom to explore employment opportunities.
In sum, employers should continue to monitor the proposed changes in law and have their employment agreements and restrictive covenants reviewed by experienced counsel to ensure maximum enforceability.
[1] Griffin Toronjo Pivateau, Putting the Blue Pencil Down: An Argument for Specificity in Noncompete Agreements, 86 Neb. L. Rev. 672 (2008).
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Judge prohibits employee’s jump to the competition, 2013 WL 2234187.
[12] Cynosure LLC v. Reveal Lasers LLC, No. CV 22-11176-PBS, 2022 WL 18033055 (D. Mass. Nov. 9, 2022).
[13] Griffin Toronjo Pivateau, Putting the Blue Pencil Down: An Argument for Specificity in Noncompete Agreements, 86 Neb. L. Rev. 672 (2008).
[14] Id.
[15] Id.
[16] Id.
[17] Shogun J. Khadye, An Uncertain Future: Georgia’s Policy on Restrictive Covenants in Employment Contracts, 2 J. Marshall L.J. 208 (2009).
[18] Sims, Tyler, Melissa McDonagh, and Michelle Devlin. “NLRB General Counsel Abruzzo Targets Employee Non-Competes under NLRA.” Littler, June 1, 2023, https://www.littler.com/publication-press/publication/nlrb-general-counsel-abruzzo-targets-employee-non-competes-under-nlra.
[19] Id.
[20] Id.
[21] Cardin M., Kelly, et al. “New York State Senate Passes Prohibitions on Non-Competes.” Ogaltree Deakins, June 12, 2023, https://ogletree.com/insights/new-york-state-senate-passes-prohibitions-on-non-competes.
[22] Id.
[23] Id.
[24] Id.
[25] RETHINKING RESTRICTIVE COVENANTS: PRACTICAL STRATEGIES, TSXA10 ALI-CLE 27
[26] Id.
[27] Id.
