Non-compete Agreements May be on the Way Out

Non-compete agreements, once a standard feature in many employment contracts, are now facing heightened scrutiny. Designed to safeguard businesses, they also have implications for workers, consumers, and the market overall. At both state and federal levels, there is a growing movement to ban—or at least limit—them.

What is a non-compete agreement?

A non-compete agreement is a contract prohibiting employees from joining competitors or initiating similar businesses for a certain amount of time after they leave their current employment. Employers may be entitled to damages if an employee breaches an agreement.

For a non-compete clause to be enforceable, it should be “reasonable” with respect to its duration, range of activities, and geographical constraints. Additionally, it should serve to defend a genuine competitive interest, rather than merely restrict an employee’s career prospects.

Background of the Proposed Federal Ban

The goal of non-compete agreements is to prevent current and former employees from divulging trade secrets, but these agreements are often criticized for limiting employees’ mobility and weakening their bargaining power. Illinois, Maine, Maryland, New Hampshire, New York, Rhode Island, Virginia, Washington, and the District of Columbia have all passed restrictions on requiring non-compete agreements from low-wage workers; California, North Dakota, and Oklahoma have passed laws banning non-compete agreements, and New York is likely to ban them soon.

At the federal level as well, interest in banning or limiting non-compete agreements is growing. The National Labor Relations Board (NLRB) claims that non-competes violate Section 7 of the National Labor Relations Act (NLRA) as they infringe on employees’ rights to seek better working conditions and employment opportunities as well as to resign, negotiate, or unionize.

Similarly, the Federal Trade Commission (FTC) claims that non-competes harm workers, the market, and consumers by suppressing wages, stifling entrepreneurship, and limiting innovation. On January 5, 2023, the FTC announced a new rule that would ban employers from imposing non-competes on their workers, estimating that the rule could increase wages by $300 billion per year and expand career opportunities for about 30 million Americans. In May 2023, the FTC announced that it would vote on the rule in April, 2024.

How Can Businesses and Employers Prepare?

We won’t know until April how the FTC votes or whether it will make changes to the rule before voting, but given its statements on the issue, it is likely to at least narrow the scope of non-compete agreements if not ban them altogether. The NLRB, on the other hand, isn’t subject to the rulemaking process at all, and can already press charges of unfair labor practices against employers who enforce them with too heavy a hand.

Employers who currently require non-compete clauses should take advantage of the time before the FTC votes to prepare for changes. They should assess their current use of non-compete agreements and develop alternate strategies to safeguard company interests, bearing in mind that existing agreements may become invalid.

Alternate strategies could include steps such as:

• Strengthening confidentiality agreements maintain trade secrets and proprietary business information using non-disclosure agreements, invention assignment agreements, and pre-existing intellectual property disclosures
• Utilizing trade secret protection laws like the federal Defend Trade Secrets Act
• Enhancing employee training to emphasize the importance of maintaining proprietary information
• Limit information-system access to authorized company users
• Using data encryption and security measures to protect data

The Future of Non-Compete Agreements

No one can say for sure what the future holds, but it seems likely that non-compete agreements will be banned or at the very least, be stripped of much of their power. As the legal landscape shifts, businesses need to be proactive, adapting their strategies to remain compliant while also protecting their core interests.

At Tonneson, we combine decades of experience with a forward-thinking approach to emerging technologies to keep our clients compliant while helping them optimize their financial strategies. Contact us today.