Navigating the Complex World of Non-Compete Agreements - A Primer for Employers

By: Matthew Damm , Oliver Katz , Jennifer Gutenberg

Long banned in California, employment non-compete agreements are now broadly under scrutiny at both the state and federal level, resulting in a complex and rapidly changing environment for employers. Many states already restrict or ban the use of non-compete agreements, with more likely to follow suit. The Federal Trade Commission (FTC) has proposed a nationwide prohibition on non-compete agreements, and the general counsel of the National Labor Relations Board (NLRB) has recently opined that overbroad non-compete agreements violate the National Labor Relations Act.

Taking stock of the rapidly changing landscape for non-compete agreements employers should be aware of not only the fundamentals of a non-compete agreement, but also when an employer might need one, how they are enforced and ways to navigate the increasingly complex patchwork of recent rulings and legislation. Below is primer for employers on these issues. For more details, access Fenwick’s webinar, “Navigating the Complex World of Non-Compete Agreements.”

History and Purpose

Non-compete agreements have existed in the United States for more than 200 years. These agreements have seen significant development alongside global business growth, with variations in application and enforcement based on jurisdiction.

They serve multiple purposes, including restrictions on competition during employment, post-employment or for a set time period following the sale of a business.

Employer Considerations for Non-Compete Agreements

Employers considering implementing non-compete agreements must weigh factors such as employee mobility and their ability to accept competitive roles, the company’s protection of its intellectual property and customer relationships, as well as establishing a legitimate business interest for the agreement. What is the company trying to protect? This is the fundamental question that employers must ask. Preventing competition alone is not a legitimate business interest.

Approaches for Non-Compete Agreements

Employers should consider various aspects of non-compete agreements, including which employees are subject to the agreement, recruiting concerns and whether other obligations or policies already address concerns like continuing confidentiality obligations.

Enforcement of Non-Compete Agreements

There is no "one-size-fits-all" approach to enforcing non-compete agreements, as drafting and enforcement depend on state law and other regional factors. Key aspects of an agreement include location, specific statute, choice of law, protectible and legitimate interests, and reasonableness in duration and geographic area.

Sale of Business and Non-Competes

Non-compete agreements in connection with the sale of a business often have specific carveouts and limitations. These considerations include evaluation of ownership interests, existing business versus future business and pushing scope and duration to maximum allowable extents. Historically, buyers seek to push the scope and duration to maximum extent allowable, but this carries risk.

What Happens When a Non-Compete Agreement is Breached?

Non-compete disputes typically begin with a strongly worded cease-and-desist letter outlining the former employee's obligations and referencing signed agreements. Parties may engage in negotiations or legal action to resolve the dispute, with the aim of establishing a record of outreach to support the argument of irreparable harm and immediate relief.

What Happens When a Non-Compete Dispute is Litigated?

The former employer may seek emergency relief to avoid irreparable harm through a Temporary Restraining Order or Preliminary Injunction (i.e., “running” to court to stop the employee from working for competitor and/or disclosing confidential and proprietary information). This process can be a significant distraction and investment of time for company executives. Disputes often settle once injunctive relief is either provided or denied.

Judicial Analysis of Non-Compete Agreements

Judicial analysis of a non-compete agreement includes examining its language in light of operative state law (e.g., is the language narrowly drawn and not overbroad?), public policy, protectable interests and reasonableness. Providing emergency relief is based on irreparable harm and likelihood of success on the merits.

Most courts take a holistic approach and ask fundamental questions, including: “What did the candidate do for the company, and did they truly have access to the secret sauce?”; “Is their new employer actually a competitor?”; and “Will their duties/obligations at the new employer overlap?”

Current Non-Compete Landscape

State laws differ widely concerning non-competes, with several states banning non-competes outright. These include California (which recently broadened the reach of ban on non-compete agreements signed out of state), North Dakota, Minnesota and Oklahoma, as well as a potential ban in New York forthcoming.

Others implement categorical restrictions, including: Salary Thresholds (e.g., Colorado, Oregon, Washington); Length of Non-Compete Period (e.g., one year in Massachusetts and 18 months in Washington); Administration of Non-Competes; “Blue Penciling” of Non-Compete; “Midstream” Non-Competes (e.g., is continued employment enough or does new consideration need to be provided?). In addition, is the non-compete agreement enforceable if employee is terminated without “cause”? Is there a sale of business exception?

Looking to the Future

In-house counsel should consider the following with regards to the use of non-compete agreements:

  • Expect continued focus on, and opposition to, non-compete agreements at the state and federal level. If the FTC Proposed Rule is implemented in its current form, it would result in nationwide ban on non-competes except in connection with the sale of a business.
  • Most states still recognize the enforceability of non-compete agreements, but closely monitor state law developments in jurisdictions in which you are using non-competes.
  • Consider whether to eliminate the use of non-competes and focus more intensely on alternate ways to protect confidential information, trade secrets and customer relationships.
  • Expect more awareness and pushback from employees being asked to enter into non-compete agreements. Adopting a comprehensive approach to protecting legitimate business interests while being mindful of employee mobility and workforce equity will benefit employers navigating the intricate landscape of non-compete agreements.