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Non-Compete Updates for All Employers

    October 11, 2023

    Federal and State Non-Compete Changes

     

    Perhaps no area of employment law has changed more recently than the law surrounding employee non-competition agreements. Two federal agencies are actively working to regulate most non-competes out of existence. More states have joined the list of jurisdictions that prohibit or limit non-competes (including many non-solicitation agreements) by enacting broad bans. Other states, although not barring all non-competes, have created new restrictions, all while courts are recognizing new legal theories for challenging them. Nonetheless, many situations remain where employers can use non-competes to protect their proprietary information and defend against unfair competition. But there are major new hurdles to overcome, and the landscape could change even more soon.

    What does all of this mean for employers? Here are the key takeaways and options for navigating this new arena:

    Reevaluate your current approach and prepare a backup plan for a scenario where non-competes become unlawful. An FTC rule or NLRB decision is highly unlikely to “grandfather” or otherwise exempt pre-existing non-competes.

     

    Consider bolstering confidentiality agreements – where lawful – to fill any gaps created by non-compete bans. Most of the developments above affect non-competition and non-solicitation agreements, but not agreements that simply require maintaining the confidentiality of trade secrets and other nonpublic business information. In many (but not all) cases, a strong and well drafted confidentiality agreement can sufficiently protect an employer’s interests.

     

    Leverage the protection available under trade secret protection laws. The developments above do not diminish rights existing under the federal Defend Trade Secrets Act or similar state laws. Because these laws focus on protecting actual trade secrets, any employer who seeks to invoke them should take steps now to ensure that it is treating key proprietary information as trade secrets under the law.

     

    Consider alternative compensation structures that can deter unfair competition. Employers can implement longevity bonuses and seniority-based pay raises to help deter unwanted departures of more senior employees who may have greater access to proprietary information and relationships, and thereby who pose more of a competitive threat.

     

    Improve training in key areas. Consider training managers to ensure that multiple employees have strong relationships with any key customers and business partners, to reduce the downside if one of them leaves. Ensure that managers regularly conduct exit interviews (and thoroughly understand beforehand the departing employee’s role and types of access), which can deter bad actors, retain proprietary information and ensure that key relationships get transitioned.

     

    Be cautious of no-poach agreements with other organizations. No-poach agreements between two organizations are far more likely to experience challenges than traditional non-competes and are far more likely to violate antitrust law.

     

    Avoid non-competes with low wage workers except in extraordinary circumstances. The FTC and NLRB are targeting these types of agreements perhaps more than any others. Further, employees in these positions are far less likely to have access to proprietary information or other duties that would be necessary to justify a non-compete in any state

     

    Focus on where you really need them. A one-size-fits-all strategy – under which all employees are required to sign non-competes – typically is not a wise approach. An overbroad approach can tie your hands in the places where it really matters. An organization that requires non-competes from broad ranges of employees may draw additional scrutiny, which can threaten its truly important agreements. Likewise, if you require a non-compete from one employee but then decline to enforce it, that can impede you from enforcing another non-compete that you truly consider necessary. If the developments above show anything, it is that employers should treat non-competes as a scalpel, not a blunt instrument.

     

    2023 Non-Compete Landscape (natlawreview.com)

     

    Commentary by: Raylea Stelmach

    Edited by: Kim Moss

     

    EPSHRM provides content as a service to its readers and members. It does not offer legal advice, and cannot guarantee the accuracy or suitability of its content for a particular purpose.