As our readers are aware, we have been tracking the ongoing trend of restricting employee non-compete agreements by various states and the federal government, including the FTC and NLRB. In fact, some states — most notably California — have issued broad prohibitions on non-compete agreements.
These contracts, which are common across a variety of industries, have been subject to ever-increasing scrutiny and limitation, even in states long seen as havens for commercial agreements, to ensure they are narrowly tailored and reasonably necessary to protect employers’ legitimate business interests.
For employers seeking to include non-compete provisions in their employment agreements, understanding the evolving legal landscape and the need for precision is more paramount than ever.
Traditionally, non-compete agreements have aimed to safeguard proprietary information, trade secrets, and client relationships. While these important interests remain, their use has expanded across industries and roles, raising concerns about potential abuse and limitations on employee mobility. Enforceability of non-compete provisions can vary significantly from state-to-state. However, in those states where non-compete agreements are not prohibited, there are some common themes that are generally considered in determining whether a restriction is enforceable. Accordingly, to ensure that non-compete agreements meet legal standards and serve their intended purpose without unduly restraining employees, we recommend that employers consider the following key factors:
- Legitimate Business Interests: Employers should craft non-compete agreements to protect genuine business interests. These may include safeguarding trade secrets, proprietary information, client relationships, or investments in specialized employee training. Employers should delineate these interests to justify the agreement’s necessity. Now more than ever, employers should consider whether their legitimate business interests are adequately protected by less onerous covenants, like non-solicitation agreements (for both employees and customers/clients) and non-disclosure and confidentiality provisions. Should employers implement various restrictive covenants in their contracts, they should identify specific or unique interests that their non-compete agreements are essential to protect.
- Narrow Tailoring: Employers should narrowly tailor the scope of non-compete agreements to protect specific business interests without unduly restricting an employee’s ability to seek alternative employment. Blanket restrictions covering wide-ranging industries may face heightened scrutiny and be deemed unenforceable.
- Geographic and Temporal Limits: Non-compete agreements should specify reasonable geographic restrictions and timeframes. These limitations should directly tie to the employer’s legitimate business interests as well as reflect the industry’s competitive landscape and the locations where the employer actually does or is actively planning to do business. Overly expansive restrictions may be deemed unreasonable and unenforceable.
- Consideration and Fairness: Non-compete agreements must be entered into willingly by both parties and be supported by adequate consideration. Employees should receive something of value in exchange for agreeing to the restrictions, such as employment opportunities, specialized training, or access to proprietary information. Employers should keep in mind that non-compete agreements signed by existing employees are not always enforceable, and some states will require the existing employee to receive meaningful new consideration, including material elevations in position or stock awards.
- Review and Revision: Employers should periodically review and update non-compete agreements to ensure they remain relevant and compliant with evolving legal standards. Changes in business practices, industry regulations, or court rulings may necessitate adjustments to the terms of these agreements.
- Legal Consultation: Given the complexity and variability of non-compete laws across jurisdictions, seeking legal counsel is advisable when drafting or enforcing these agreements. Our experienced attorneys can provide valuable guidance on compliance with state and federal regulations and help mitigate the risk of litigation.
In light of increased scrutiny from lawmakers and regulators as well as the complex patchwork of state authority governing this area of law, employers must approach the use of non-compete agreements judiciously. By carefully considering the necessity, scope, and fairness of these contracts, employers can protect their legitimate business interests while respecting the rights and mobility of their employees and fostering a balanced and equitable employment landscape.
