Non-Compete Agreements: Provide Them Ahead of Time – But Don’t Let Them Be Signed

On March 8, 2022, the Fifth Circuit Court of Appeals held that a non-compete agreement was not enforceable because the employer seeking to enforce the agreement had presented it to the employee, and the employee had signed it, before the employee’s first day of work.  A few months later, Colorado Governor Jared Polis signed into law a new statute requiring that notice of a non-compete agreement be provided to prospective employees before they accept an offer of employment.

In finding a non-compete provision must strictly comply with Louisiana law, the court in Rouses Enterprises, L.L.C. v. Clapp, No. 21-30293 (5th Cir. Mar. 8, 2022), found that Louisiana law (LA. REV. STAT. ANN. § 23:921(A)(1)) permits certain non-compete agreements between employers and employees, but not between job applicants and potential employers.  Thus, the court reasoned, a non-compete agreement signed by a prospective employee before her actual date of hire was unenforceable.

In August 2022, a very restrictive non-compete statute will take effect in Colorado which, among other things, requires employers to provide prospective employees with advance notice that, as a condition of their employment, they will be required to sign a non-compete or non-solicit agreement.  (Oregon and Maine have enacted similar notice requirements in recent years, and New Hampshire has required advance notice for a decade.)  The Colorado statute requires the notice to be written in clear and conspicuous terms, and it must be signed by the prospective employee.  An employer can satisfy the notice requirement by providing a copy of the non-compete or non-solicit agreement to the prospective employee together with a notice containing specific language supplied by the statute and directing her to the particular provisions of the agreement that contain the non-compete or non-solicit language.

A few observations from these developments may be useful to employers:

  • First, while restrictive covenant agreements have long been subject to particularized—indeed, in some instances, onerous—requirements in many states, there has been a continuing push both within state legislatures and among the courts toward an increasingly restrictive view of the proper scope and role of such agreements in the employer-employee relationship.
  • Second, it is critical for employers to be aware of the specific statutory and common law requirements that apply to restrictive covenants in those states where they have employees.  Employers should strictly adhere to those requirements, or else they put their ability to enforce their non-compete or non-solicit agreements in jeopardy.  This, of course, can be challenging for employers that operate in multiple states in which the applicable requirements differ, but it is possible to develop procedures, policies and carefully drafted agreements that can comply with applicable state law limitations and requirements.  And to the extent interstate employers view it important to safeguard their investment in their employees and protect their market position against unfair competition, there is significant value in making that effort.
  • Finally, it makes sense and is generally best practice for employers to inform prospective employees about any non-compete or non-solicit agreement conditions to employment in connection with extending employment offers – to ensure that they have ample time to review the agreement before starting employment – and to make signing of any such agreement part of an employee’s first-day onboarding process (or signed before the first day of employment, where permitted by applicable law).  Even in states that do not have an explicit advance notice requirement, providing such a notice causes no harm to the employer and, if anything, makes the employer look all the more reasonable in any subsequent litigation in which the employer seeks to enforce the agreement.