Navigating the Trend to Ban Non-Compete Clauses in Employment Contracts

Government is gradually cracking down on a previously accepted standard in employment contracts: non-compete clauses. More and more states are placing strict bans on these clauses and attempts to enforce them. Colorado, for example, has made it a crime for an employer to attempt to enforce an invalid non-compete clause.¹ Other states have also taken drastic measures banning the enforcement of these clauses. Even the Federal Trade Commission has proposed a broad ban on these clauses.

States Banning or Limiting Non-Compete Clauses

Noncompete agreements² are essentially terms in an employment contract that limit or prevent an employee from working for competitors, soliciting customers, or using or disclosing trade secrets obtained from the employer after the employee leaves.

Each state has its own unique statutes and/or case law defining the scope and enforceability of non-compete clauses. Both California³ and Oklahoma⁴ have banned non-compete agreements, making such clauses in contracts void. Colorado,⁵ Connecticut,⁶ Illinois,⁷ Maine,⁸ Maryland,⁹ Massachusetts,¹⁰ Nevada,¹¹ New Hampshire,¹² Oregon,¹³ Rhode Island,¹⁴ Virginia,¹⁵ and Washington¹⁶ have strictly limited the circumstances and individuals against whom such clauses may be enforced. Particularly, under these state statutes, employers cannot enforce non-compete agreements against low-wage workers. This was likely in response to employers over-reaching with broad non-compete agreements that tried to prevent people from finding work where they could use their skills.

The Federal Trade Commission

The FTC has recently announced it is considering a new rule that would ban the enforcement of non-compete agreements against workers. Chair Lina M. Khan said, “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy.”¹⁷ She added that these types of contractual limitations “block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.” Her hope is that banning the enforcement of non-compete clauses would promote healthy competition and innovation. According to the FTC, non-compete clauses prevent would-be entrepreneurs from creating businesses that could compete with their former employers. They also discourage workers from bringing forward new ideas, which stifles competition and can cause higher prices for consumers.

But the U.S. Chamber of Commerce has threatened to challenge the FTC’s proposed ban in court, claiming that not only is a blanket ban on the enforcement of non-compete clauses inappropriate, but also that the FTC as an agency lacks the statutory or constitutional authority to issue a sweeping non-competition rule.¹⁸ As of early March 2023, the FTC has delayed implementation of this ban.

How to Navigate these Bans and Limitations

Currently, whether or not employers can successfully enforce non-compete clauses in employment contracts depends on the state in which the contract is being enforced as well as the date in which the employment contract was entered into. For those states that do not have an outright ban, employers must know whether the employee is protected by statute and, if so, whether the statute was in effect at the time the agreement was made. Many employers intentionally have very broad non-compete agreements, knowing that they are unreasonable or overbroad, and thus likely unenforceable. These non-compete agreements are designed to pressure employees into not leaving to work for competitors or to scare ex-employees into not competing. This can be problematic. In Colorado, for instance, it could be considered a crime for an employer to baselessly threaten an ex-employee’s right to work. This means that, at least in some states, employers should not use the non-compete clause as a scare tactic. And of course, such tactics are morally problematic everywhere.

But for states that do enforce non-compete agreements against workers, there are still important aspects to be aware of. Typically, when asked to enforce an agreement, a court will determine if it is reasonable in relation to the employer’s protectable interests, how broad the geographic restriction is, and how long it lasts. This depends on the facts of each case. Some courts have held that five years is reasonable, but others have held one year as unreasonable. A typical reasonable length of time might be a year or two. Geographic restrictions can also be considered unreasonable. A court often looks to the previous employer’s clientele and its general geographic location. A court is more likely to uphold a non-compete that only limits solicitation of the employer’s known and current customers. But a court will typically reject a geographic restriction that spans an entire state, or one that encompasses a broad pool of potential consumers. Consider, as a hypothetical, a landscaping company that has cornered a particular housing development “Willow Acres.” It would likely be reasonable for the employer to restrict ex-employees from soliciting clients in Willow Acres for a couple of years, but perhaps not the entire city, and definitely not the entire state.

Additionally, some courts will “blue pencil” the agreements in order to make them reasonable. In other words, a judge might say that a three-year statewide noncompete clause in contract is unreasonable, and then simply change it to a two-year citywide covenant not to compete. Of course, whether a court blue pencils the agreement depends on the laws of the particular state in which the agreement is being enforced.

Employers should be aware that trying to have an unreasonable and overbroad non-compete agreement enforced in court could be an expensive waste of time, especially with an agreement that was intentionally over the top. To avoid pointless litigation expenses, needless conflict, and even the possibility of being charged with a crime, employers should speak to legal counsel before threatening to enforce non-compete covenants against ex-employees.

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¹ See previous Telios Tip on the Colorado law: /blog/businesssafe/non-competes-and-trade-secrets-colorados-potential-new-law.

² They may also include non-disclosure and non-solicitation agreements.

³ California Business & Professions Code § 16600 (2017).

⁴ Oklahoma Statute Tit. 15 § 219A (2014).

⁵ Colorado Revised Statute § 8-2-113 (2021).

⁶ Connecticut General Statute § 20-14p (2016).

⁷ 820 Illinois Compiled Statutes 90/10 (2022).

⁸ 26 M.R.S.A. § 599-A.

⁹ Maryland Code, Labor & Employment § 3-716.

¹⁰ Massachusetts General Laws 149 § 24L.

¹¹ Nevada Revised Statutes § 613.195.

¹² N.H. Revised Statute § 275:70 and 70-a.

¹³ Oregon Revised Statute § 653.295.

¹⁴ General Laws of Rhode Island 1956, §28-59-1 through 3.

¹⁵ Virginia Code § 40.1-28.7:8 (2020).

¹⁶ Revised Code of Washington § 49.62.20.

¹⁷ Federal Trade Commission, FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition. Located at: https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.

¹⁸ U.S. Chamber of Commerce letter to Seantors Warren and Whitehouse; located at: https://www.uschamber.com/assets/documents/230302_NoncompetesResponse_Sens.WarrenWhitehouse_2023-03-02-165212_nsdh.pdf.

Featured Image by Rebecca Sidebotham.