The Sky is Falling? Competing Proposals to Prohibit Noncompete Agreements

I confess. When the Federal Trade Commission first announced a proposed rule to ban noncompete agreements, I recoiled in horror because noncompetes are such a fixture of employment agreements especially those for senior executives. But, having taken a deep breath, it occurred to me that a uniform rule might not be the end of the world.

Here’s why. Presently, my government contractor clients, many of which operate in locations around the country and even the world, face a patchwork of laws that vary amongst the states. Several states ban them outright – California comes to mind (no surprise there). Some states ban them for employees who are paid less than some statutorily-fixed amount – the District of Columbia, Colorado, and Washington are among the states that fall into this category.

And, last, some states leave the issue to their courts. That’s where the patchwork gets even more complicated. Generally, the courts view noncompetes with some skepticism and assess whether the agreement is reasonable in terms of the agreement’s scope, particularly with respect to geography and duration. Within that, some courts “blue pencil” unreasonable agreements to make an unreasonable clause reasonable. Others won’t try to fix the problem and just toss the clause completely.

Consider this – how should an employer draft a noncompete agreement for employees who reside and work remotely in one state for employers whose headquarters are located in a second state at a time when the employees’ work is devoted to business operations in a third state. Now that remote work has become far more commonplace, this scenario occurs over-and-over.

In the last month, the Federal Trade Commission announced a proposed rule with the stated intention to “categorically ban employers from using noncompete clauses” prospectively and retrospectively. Meanwhile, a recurring bipartisan proposal to limit, but not completely ban, such provisions was recently reintroduced by Senator Christopher Murphy (D-Connecticut). Its provisions would ban noncompetes going forward but would allow them under certain circumstances for senior executives and highly paid workers.

More and more, it seems to me that noncompetes are a pain in the neck to craft in the remote working environment and simply are on the way out despite the vociferous objections coming from the business community.

What to do? Employers should really consider what’s truly at stake for them competitively. Usually, my clients fear their employees might bail out and steal their customers and they don’t want their intellectual property and trade secrets to find their way into their competitors’ hands. Employers still will be able to guard against these risks through thoughtfully crafted confidentiality agreements and nonsolicitation clauses. While there could be limits on such clauses if they simply are a functional substitute for a blanket noncompete, they’re not on the chopping block.

Thus, keep calm and carry on – the sky actually may not be falling after all.