There is an oversimplified view in the press and on social media that non-competes are bad—very bad—and that employers are far too aggressive in enforcing them. These opinions understandably flow from reports of non-competition clauses abusively enforced against low-wage employees such as sandwich makers and dog sitters. To fix this “problem,” a group of Democratic Senators has introduced the Workforce Mobility Act of 2018 (the WMA) (Senate Bill 2782, with an identical version in the House at H.R. 5631).
Unfortunately, the WMA attacks with buckshot, imposing a flat ban on all covenants not to compete for all U.S. employers and employees engaged in “commerce.” The approach is overbroad, and fails to account for different kinds of employees or different types of restrictions. While there are valid objections to non-competes restricting low-level employees, the more traditional use of non-competes to protect businesses are still appropriate and should not be eliminated. Moreover, the WMA leaves many open questions that could result in further litigation for years to come.
By its terms, the WMA’s ban would provide that “[n]o employer shall enter into, enforce, or threaten to enforce a covenant not to compete with any employee of such employer, who in any workweek is engaged in commerce or in the production of goods for commerce (or is employed in an enterprise engaged in commerce or in the production of goods for commerce).” The bill defines a “covenant not to compete” broadly to mean:
an agreement, entered into after the date of enactment of this Act between an employer and an employee, that restricts such employee from performing, after the employment relationship between the employer and the employee terminates, any of the following: (A) Any work for another employer for a specified period of time. (B) Any work in a specified geographical area. (C) Any work for another employer that is similar to such employee’s work for the employer that is a party to such agreement.”
The bill provides for civil fines and a private right of action (including punitive damages) against violating employers, and carves out confidentiality provisions consistent with the Defend Trade Secrets Act, 18 U.S.C. §1836.
The WMA is sponsored by Senators Christopher Murphy (Connecticut), Elizabeth Warren (Vermont) and Ronald Wyden (Oregon). Senator Warren’s press release states that the act is intended “to allow workers to pursue new jobs and higher wages without fearing legal action from their former employers.” www.warren.senate.gov/newsroom/press-releases/warren-murphy-wyden-introduce-bill-to-ban-unnecessary-and-harmful-non-compete-agreements. It asserts that non-competes result in “lower wages and diminished entrepreneurship,” claims they “are common even among low-wage workers,” and references a “rigged system” to stifle workers and inhibit growth.
Provocative political rhetoric distorts the matter, ignoring legitimate uses of non-competes and the many forms of such agreements. It is true that non-competes are increasingly used as retention devices to lock in lower-tier workers, a practice that is justifiably criticized. Such abuses do not justify simply scrapping these contractual provisions, which have been around for hundreds of years.
Non-competes are also used legitimately by companies to restrict executives and other high-level, highly-compensated employees from taking strategic plans, scientific know-how, specific customer knowledge and other valuable information to competitors. Thus, while the WMA may seek to protect employees who want to leave, non-competes can legitimately protect both the company and its employees who want to stay. Even if you believe that non-competes should be banned for hourly or other low-wage workers, that does not mean they should be banned for executives being paid in the high six figures or better.
New York and other U.S. courts have been reluctant to enforce non-competes, but the jurisprudence has developed, on a state-by-state basis, to balance the legitimate protectable interests of employers with the understandable desire of employees to better their employment situations. The fact patterns in these cases vary tremendously, but there are some rules of thumb, including:
• It is easier to enforce non-competes against higher paid employees.
• It is easier to enforce non-competes against employees who truly have access to trade secrets or other confidential information.
• It is easier to enforce non-competes against employees who commit misconduct, such as purposefully stealing company information or soliciting customers before quitting.
Unfortunately, the WMA makes no distinction as to the type of employee at issue. The Mobility and Opportunity for Vulnerable Employees (MOVE) Act, introduced in 2015 by Senators Chris Murphy and Al Franken, would have barred non-competes for employees making less than $15 an hour, but did not become law. The WMA, by contrast, would apply to $15-an-hour line employees, $15-million-a year-executives, and everyone else involved in “commerce” (a broad term intended to get justify federal legislation in a matter traditionally subject to state law).
In addition, the WMA defines the term “covenant not to compete” too expansively. Companies utilize many different provisions, ranging from classic non-competes that preclude “competing” in the same business, to more limited prohibitions against soliciting clients or recruiting other employees of the former employer. Such provisions may also be prohibited by the WMA as agreements that restrict “any work for another employer.” The lack of precision, however, would likely leave the determination open for further litigation.
The WMA may also forfend “paid for” provisions limiting competition, including notice of resignation requirements (such as 30 or 60 days), or “garden leave” provisions, which allow an employer to extend the employment term for some period of time, on a compensated basis, during which the employee may not start another job. Provisions like these have become more common, especially as the courts have been hesitant to enforce naked non-competes that preclude a former employee from taking any job in his or her line of work. Again, whether or not such clauses are covered by the WMA would be fodder for the courts going forward.
Non-competes are also found in deferred compensation agreements, including stock plans granting options or unvested shares to employees, or accompanying signing bonuses, retention bonuses or “advances,” which may be “clawed back” if an employee leaves and competes. The WMA can also be read to prohibit these kinds of arrangements too, though it is not clear if that is the intent. Similarly, while it has long been the rule of law in most places that the ability of an individual to compete may be limited in connection with the sale of a business, there is no carve-out in the WMA for this traditional exception. Impeding sales of businesses would not boast the economy in the manner the bill’s drafters intend.
Presumably, the enactment of federal legislation would move non-compete litigation to the federal courts. Departing employee litigation can end up there anyway, if there are alleged violations of Federal law such as the Defend Trade Secrets Act, or if there is diversity of citizenship between employer and employee. Enactment of the WMA, however, would likely make federal court the default home for non-compete litigation, a result that at least some employers would embrace, especially as they struggle to limit the impact of the new law.
Putting choice of forum aside, and even if the goal is to bar all non-competes for all employees for all purposes, the WMA needs some revision. By design, the bill is not retroactive—it applies only to non-competes entered into after enactment. If and when it appears close to becoming law, its interim effect may be to encourage a flood of non-compete agreements by employers concerned they will soon be precluded from imposing them. And it would leave, for some time, a massive imbalance in the workforce between employees who still have non-competes and those who do not. This is likely to end up as an imbalance between older workers (still constrained from switching jobs) and younger ones (free to move about). At least in the short term, it is hard to see all of this reducing the number of court cases involving non-competes.
It is something of a mantra for lawyers who draft them that there is no such thing as a one-size-fits-all covenant not to compete that can be cavalierly popped into any employment contract. A proper restriction must be crafted with all of the specifics regarding the employer, the job and the employee in mind. Similarly, a rational legislative limit on the use of non-competes must be drafted with care, such that it addresses the problem without over-reaching and is itself understandably written, and so it does more than become yet another statute requiring further interpretation by the courts. Enforcing all non-competes no matter what would be absurd. Banning them all is not any better.
Richard Schoenstein is a litigation partner with Tarter Krinsky & Drogin, handling business and employment disputes including non-competes and other employee mobility matters.