is the non competition agreement headed for the dustbin of legal history

By Dr. Jim Castagnera, Esq., Partner, Portum Group International, LLC

Earlier this year in this space, I reported that the U.S. Federal Trade Commission had taken initial steps to ban most non-competition agreements between employers and individual employees.  The agency’s announcement stirred up a tsunami of comments and criticisms, leading to a delay of final regulations until at least next year.  According to Bloomberg Law:

The Federal Trade Commission is expected to vote next April on the final version of its proposal to ban noncompete agreements in employment contracts, according to a person familiar with the matter.

The agency received nearly 27,000 comments on the draft rule proposed in January. Banning most noncompetes would impact about 30 million Americans and boost wages by nearly $300 billion per year, the FTC estimated.

The commission will follow a process similar to rulemaking at other federal agencies, especially given the high number of comments, according to the person. Staff will consider changes to the rule once they’ve reviewed the comments, the person said.

https://news.bloomberglaw.com/antitrust/ftc-expected-to-vote-in-2024-on-rule-to-ban-noncompete-clauses

This sounds to me more like a delay than a knuckling under by the agency to political pressures, intense as those pressures might be.  Of course, 2024 is a national-election year in the United States.  As I write this Blog on September 18th, most polls indicate that Donald Trump will be the GOP’s presidential candidate.  Trump hopes to be the once and future king of America, despite the four criminal indictments pending against him.  And he may not just be dreaming.  Polls also show that, if the election were tomorrow, instead of 14 months away, he and incumbent Joe Biden would be neck and neck.  Of course, anything can happen between now and November 2024.  But if we assume a Trump reprise in the White House, then I’m comfortable predicting here that the FTC’s final regulations will be withdrawn shortly after he’s sworn in.

That said, the signs are strong across America and Europe that the employer-employee noncompetition agreement is headed for the jurisprudential dust bin… eventually.  But only eventually.  In the United States, this is because the FTC is not alone in seeking to ban such restraints.  

Coming on the heels of the Federal Trade Commission’s proposed rule banning employee non-competes and one week before the National Labor Relations Board’s General Counsel published a memo taking the position that non-competition agreements violate the National Labor Relations Act “[e]xcept in limited circumstances,” on May 24, 2023, Minnesota’s Governor signed into law Bill SF 3035 banning employee non-compete provisions. 

Becoming the fourth state (joining California, Oklahoma, and North Dakota) to adopt a statute declaring employee non-competition agreements unenforceable, Minnesota, effective July 1, 2023, prohibits employers from entering into non-competition agreements with any individual who resides or works in Minnesota (though the law will continue to permit non-competition agreements entered into in connection with the sale of a business or in anticipation of the dissolution of a business).

https://www.wilmerhale.com/insights/client-alerts/20230705-states-continue-trend-of-banning-employee-non-competes

New York, almost as big a force in the American economy, is also seriously considering such a ban.  The NLRB General Counsel’s memo is certainly a shot across American business’s bow. And, across the pond, the United Kingdom, while not prepared to ban all employer/employee noncompetes, appears headed toward a miserly three-month cap on such restrictions.

https://katten.com/non-competes-movement-on-both-sides-of-the-atlantic

Does this mean your company should give up on imposing noncompetition clauses in your employment contracts?  Well, if you are in one of the four states listed above, probably yes.  Or at least you should have your employment attorney take a long, hard look at your existing contracts and read the state statutes and regs very carefully.  No ban is 100%, nor will that be the case with the anticipated FTC final regulations.  There always are exceptions.  For instance, a noncompete in conjunction with the sale of a business is considered a reasonable way to protect the goodwill value of the vended entity.  So, if the seller stays on as an employee --- not an uncommon scenario --- a noncompete proviso in her employment contract is very likely to be enforceable in almost every jurisdiction.

Most of you readers of this week’s Blog, pending a sweeping FTC ban that survives inevitable court challenges and a possible Trump second term, are doing business in jurisdictions that have yet to leap on the four-state band wagon.  For all of you --- who remain the solid majority --- the old rules about the enforceability of noncompetes remain in effect.   This means:

1. To be enforceable your noncompetes must be reasonable regarding the amount of time, post-employment, they are in effect --- two years is usually the outer limit a court will entertain --- and their geographic reach.  That latter limitation is tricky in this Internet age.  What if your firm sells products or services online?  Does this mean that the whole worldwide web is your protected terrain?  The handful of courts that have considered this conundrum have refused to give the former employer this kind of protection, since it would amount to a complete prohibition on practicing the employee’s profession.

2. Your noncompetes need to be supported by reasonable consideration.  A lot of state courts across the country refuse to consider employment-at-will a sufficient quid pro quo for a noncompetition clause.  So be sure to provide, and recite in the employment contract, something more that the new hire is getting from you in return for the post-employment limitation you’re demanding of her.  This can be something as simple as a for-cause-only limit on termination of her employment.  Or it can be a specified length of initial employment.  And again, it can be a notice or severance-pay provision relating to any employment termination down the road.  Some extra employee benefit, that others don’t get, can support the noncompete, too.  You have a lot of wiggle room here.

Bottom line:  Reports of the imminent demise of the noncompetition agreement, which have been proliferating, may be untimely.  This doesn’t mean your enterprise should abuse this privilege.  Even though the FTC’s ban on noncompetes may never become a reality, be aware that the agency is already going after what it considers abusive use of this restraint on trade.  To wit, check out this March 15, 2023, FTC press release:

The Federal Trade Commission ordered manufacturing company Anchor Glass Container Corp. to drop noncompete restrictions that it imposed on its workers, the fourth time this year that the agency has taken action against companies that use harmful noncompetes.

In a complaint filed against Anchor and its owners, Lynx Finance GP, LLC and Lynx Finance L.P., the FTC said Anchor illegally imposed noncompete restrictions on more than 300 workers across a variety of positions, including salaried employees who work with the plants’ furnaces and forming equipment and in other glass production, engineering, and quality assurance positions.

https://www.ftc.gov/news-events/news/press-releases/2023/03/ftc-takes-action-against-another-company-imposed-harmful-noncompete-restrictions-its-workers

Many courts, too, take a hard line against employers who show up, seeking enforcement of their noncompete clauses against departing employees, when the judges detect so-called “unclean hands” in the case.  Some judges lack the power, or flat-out refuse, to reform unreasonably long or geographically vast limitations on competition.  Others take umbrage with employers who wrongfully discharge employees and then try to enforce their noncompetes.  Still others rule for employee-defendants where the plaintiff-employers haven’t properly paid the sued workers.  

In short, for most of you employers out there, the noncompetition agreement remains as of this writing a viable tool in your bag of tricks… so long as you use that tool in a fair and reasonable way.