Tightening Restrictions on Noncompetes
Tightening Restrictions on Noncompetes
Many employers have long used noncompetition agreements, or noncompetes, as an important tool for preventing former employees from unfairly competing against them. Although only a few states outright ban noncompetes with employees, most states permit employers to use noncompetes as long as they are reasonable and limited to protecting the employer’s legitimate interests. In recent years, however, state legislatures have increasingly begun chipping away at the power of noncompetes by passing laws limiting the scope of those agreements. And many other states are considering similar restrictions.
An Overview of Recent Changes
In the last several years, many states, including California, Idaho, Illinois, Nevada, New Mexico Massachusetts, and Washington, have enacted laws restricting the use of employee noncompetes. Although the types of restrictions vary by state, those limitations generally include:
Some of the most sweeping changes to noncompetes were passed in Washington and Massachusetts.
On May 8, 2019, the Washington governor signed House Bill 1450 into law imposing significant limits on noncompetes. The new law, which goes into effect on January 1, 2020, places a number of roadblocks for employers intending to issue new noncompetes for their employees or even to enforce existing agreements. Some of the more significant requirements include:
Washington law goes further than other state noncompete laws by penalizing employers for noncompliance. If a court or arbitrator rejects, reforms, modifies, or, even, partially enforces a noncompete, it must require the employer to pay the employee the greater of $5,000 or the employee’s actual damages plus the employee’s costs and attorneys’ fees. This applies to all noncompete proceedings commenced after January 1, 2020 to enforce the restriction, regardless of when the noncompete was entered.
Massachusetts’ new law restricting noncompetes went into effect on October 1, 2018. Like Washington, Massachusetts added a number of new requirements for noncompetes with Massachusetts based employees. Some of the more onerous requirements include:
Hostile Trend Towards Noncompetes Likely To Continue
The increasing number of noncompete laws is likely to continue as more states consider issuing similar laws limiting noncompetes with employees. Indeed, as many as 20 states and the federal government are seeking to weaken noncompetes in some way. On the federal level, Senator Marco Rubio of Florida has introduced a bill that would ban noncompetes for most employees classified as nonexempt under the Fair Labor Standards Act. Arkansas, Vermont, and Pennsylvania have pending bills seeking to completely ban the use of noncompetes for employees in those states, though like California, these laws would probably not apply to noncompetes in the sale of business context. The New Jersey Senate is also considering a bill with restrictions largely emulating those instituted by Massachusetts.
Legislatures are not alone in tightening restrictions on noncompetes. Both the Illinois and New York Attorneys General have pursued enforcement actions against employers who use noncompetes, including entering into a settlement agreement with Jimmy John’s to prevent it from having noncompetes with its sandwich makers. More recently, WeWork entered into a settlement agreement with the New York and Illinois Attorneys General, in which WeWork agreed to rescind noncompetes for certain categories of employees, narrow the scope of those agreements with others, and use new, less restrictive language in its noncompete agreements going forward.
What This Means for Employers
Given the growing number of limitations placed on noncompetes, employers may need to rethink their strategies for using noncompetes to prevent their former employees from unfairly competing. Long-used form agreements may need to be rethought, alternative ways to prevent unfair competition may need to be explored, and existing agreements with key employees may need to be redrafted.
Companies operating in multiple jurisdictions should revisit their noncompete agreements, particularly if they are using the same template agreement across their organization. Noncompetes that are lawful in one state may now expose the employer to liability if signed by, for example, a Washington-based employee. Employers should consider working closely with in-house and outside counsel to ensure that any noncompetes protect the employers’ interests rather than endanger them.
Employers may also want to consider whether other types of post-employment restrictions, such as nonsolicitation or nondisclosure agreements, could achieve their goals. Notably, the growing chorus of state noncompete laws generally do not apply to agreements prohibiting former employees from soliciting the employer’s employees or customers or prohibiting disclosure of the employer’s confidential information. In some instances, nondisclosure and nonsolicitation agreements may be equally effective as noncompetes in protecting the employers from unfair competition. Employers might also consider agreements that do not expressly prohibit an employee from working for a competitor, but encourage them not to compete. For example, some states, like New York, apply a relaxed standard of review for agreements that require former employees to forfeit post-employment payments if they work for a competitor.
 States currently banning noncompetes restricting employees from working for a competitor after their employment are California, North Dakota, and Oklahoma.