Thursday, December 15, 2016

Noncompetition Agreements—An Update

Nearly two years ago, we wrote about noncompetition agreements in the wake of news that sandwich maker Jimmy John’s required low-level employees to agree to highly restrictive noncompetition clauses. Last week, Jimmy John’s agreed to pay $100,000 to settle a suit brought by the Illinois attorney general’s office over the issue, and the company reached an agreement with New York’s attorney general earlier this year. The Illinois Jimmy John’s settlement is merely the latest in a year full of developments relating to noncompetition agreements.
 
Noncompetition agreements are traditionally governed by state law, but the federal government is starting to weigh in.  This year, the Obama administration issued a report and fact sheet on the subject and called on states to pass laws restricting noncompetition agreements, citing substantial misuse and overuse of noncompetition clauses. Earlier in 2016, the U.S. Department of Treasury issued a report making the case that the benefits of noncompetition agreements to employers are outweighed by the expense to workers and the broader economy. Academic researchers agree, suggesting that enforcement of noncompetition agreements hurts entrepreneurship and economic growth.
 
States appear to have heard the federal government’s call, because state reforms of noncompetition agreements have been ongoing in 2016. Measures to limit the use of noncompetes have recently passed in Illinois and Utah, while restrictive efforts in Massachusetts expired before the end of the legislative term. New York’s attorney general has been actively working to reduce corporate use of noncompetition agreements and intends to propose restrictive legislation in New York next year. 

 
As these 2016 developments suggest, the enforceability of noncompetition agreements varies widely by state. California, North Dakota, and Oklahoma currently prohibit noncompetition agreements by statute, while 26 other states place some statutory restrictions on their use. Even in states without statutory regulation of noncompetition agreements, enforceability is not assured. Courts across all jurisdictions are generally reluctant to enforce noncompetes and will scrutinize them closely. Indeed, litigation over non-competes has dramatically risen in recent years as businesses increasingly use the agreements, and employees and regulators challenge them.
 
Nearly a fifth of U.S. workers are covered by noncompetition agreements. Although noncompetition clauses are common in technology and sales fields and among high-level employees, employees in other industries and job levels are increasingly asked to sign agreements. In fact, roughly 15 percent of low-skill workers in the U.S. are subject to a noncompetition clause. Some employers require all employees to sign noncompetition agreements when first hired, or may ask employees to renew their agreements annually.
 
Here are some practical pointers for employers who have or are considering noncompetition agreements.
 
  • Make sure you really need one. Noncompetition agreements can be difficult to enforce, and they can pose other problems for businesses. Think carefully about which employees actually pose a threat of future damage through competition and whether your objectives can be accomplished through other means, such as a non-solicitation or non-disclosure agreement.
  • If you’re going to have a noncompetition agreement, make sure to tailor it properly. Whether a noncompetition clause is enforceable will depend heavily on the particular facts and circumstances, but a court will not hesitate to disregard a noncompetition clause it finds unreasonable. Think about the nature of the employee’s work and the duration and scope of the limitation. The narrower the restriction is on the employee, the more likely it is to be enforced.
  • Offer the employee a benefit for signing the agreement. A noncompetition agreement is a legal contract. The employee is giving up rights and must receive something in return. Making a job offer contingent on signing is generally sufficient if the agreement is signed at the start of employment. If you’re asking a current employee to sign, some additional compensation—other than the promise of continued employment—should be offered.
  • Remember the difference between noncompete and non-solicitation or confidentiality provisions. A non-solicitation covenant restricts an employee’s ability to solicit the customers or employees of a former employer, while a non-compete clause restricts an employee’s right to directly compete with a former employer. A confidentiality agreement prohibits an employee from disclosing confidential or proprietary information. Confidentiality and non-solicitation agreements are much more likely to be enforced because they are less likely to keep workers from earning a living.
  • Stay aware of legal developments in states where you operate. Rules vary widely by state, and legislative and judicial attitudes towards noncompetition agreements are continually shifting. It’s important for any employer who uses noncompetes to know and follow the rules in the jurisdiction where it operates. 
Posted by Laura Bartlow