What Employers Need to Know about the Government’s Recent Scrutiny of Non-Competes

For more than 400 years, private businesses have used non-compete agreements in one form or another to protect their legitimate business interests, such as long-standing customer relationships, investment in specialized training, or development of trade secrets. They are commonplace in many employment contracts in a variety of industries ranging from retail, insurance, healthcare, financial services, technology, engineering, and life sciences.  Some state legislatures and courts have curtailed their use in certain industries or professions.  California, for example, prohibits them unless limited exceptions apply.  Cal. Bus. Code §16600.  Most states prohibit them for legal professionals.  Many courts can modify or “blue pencil” them if the restrictions are found to be broader than necessary to protect an employer’s legitimate business interests.

Historically, federal and state agencies have generally stayed out of the mix in terms of regulating or challenging private businesses’ use and enforcement of non-competes.  However, a recent uptick in government enforcement activity suggests a new wave of challenges is on the horizon for employers.

The U.S. Government Takes Aim at Non-Competes

In March 2016, the Office of Economic Policy of the U.S. Department of the Treasury issued a report titled, “Non-Compete Contracts: Economic Effects and Policy Implications.”  According to the report, an estimated 18% of all workers, or nearly 30 million people, have non-compete agreements.  The report discusses the effects of non-competes on worker mobility and economic growth, and recommends greater transparency and communication with employees.

Two months later in May 2016, the White House released a report titled, “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses.”  The report’s preamble explains that, “the President has directed executive departments and agencies to propose new ways of promoting competition and providing consumers and workers with information they need to make informed choices, in an effort to improve competitive markets and empower consumers’ and workers’ voices across the country.”  It outlines States’ efforts to curtail the use of non-competes, and announces that “[i]n the coming months, as part of the [Obama] Administration’s efforts to support competition in consumer product and labor markets, the White House, Treasury, and the Department of Labor will convene a group of experts in labor law, economics, government and business to facilitate discussion on non-compete agreements and their consequence.”  The goal of this initiative is to identify “key areas where implementation and enforcement of non-competes may present issues,” examine “promising practices in states,” and put “forward a set of best practices and call to action for state reform.”

State Agencies File Lawsuits to Limit Use of Non-Competes

Apparently hearing the White House’s “call to action for state reform,” some states appear to have stepped up their enforcement efforts.  For example, on August 4, 2016, the New York Attorney General’s Office issued a press release announcing that a nationwide medical information services provider agreed to stop using non-competes for most of its employees in New York.  The non-competes had prohibited all employees, including “rank-and-file workers,” from working for competitors after their employment ended, regardless of whether they had access to trade secrets or other sensitive information.

In June 2016, the Illinois Attorney General’s Office filed a lawsuit against Jimmy John’s franchises “for imposing highly restrictive non-compete agreements on its employees, including low-wage sandwich shop employees and delivery drivers whose primary job tasks are to take food orders and make and deliver sandwiches.”  [Press Release] The Complaint alleges that Jimmy John’s has engaged in unfair conduct in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, seeks a declaration invalidating the non-competes and $50,000 per violation.  Jimmy John’s previously had reached a deal with the New York Attorney General’s Office, agreeing to not use non-compete agreements for most of its workers in New York.

The NLRB Strikes Down Private Employer’s Non-Competes

In addition to the uptick in state enforcement activities, the NLRB has weighed in.  On July 29, 2016, a three-member panel of the National Labor Relations Board found that steel product company, Minteq International, Inc., violated federal labor law by requiring new employees to sign non-compete and confidentiality agreements as a condition of their employment without giving Local 150 of the International Union of Operating Engineers the opportunity to bargain on this issue. Minteq Int’l, Inc. & Specialty Minerals Inc. v. Int’l Union of Operating Engineers, 13-CA-139974, 364 NLRB No. 63 (7/29/2016).  Local 150 filed an unfair labor charge after Minteq sent letters to a former employee reminding him of his 18-month post-termination non-compete obligations.  The Board found the non-compete was a mandatory term of employment, and as such, the Union should have been notified and given the opportunity to bargain prior to its implementation.  It concluded that Minteq’s unilateral imposition of the non-compete as a condition of employment violated Section 8(a) of the National Labor Relations Act.

Key Takeaways

Most often a “one size fits all” approach to non-competes is not necessary to protect an employers’ legitimate business interests.  In light of the government’s recent focus on and scrutiny of non-competes, employers should evaluate the scope and structure of their non-competes.  Agencies appear focused on companies that require all employees, regardless of whether they have access to trade secrets or other sensitive information, to sign post-termination non-competes.  Consider whether such across-the-board agreements are necessary to protect their legitimate business interests.  Selective use of non-competes may go a long way to staving off challenges to an employer’s use of non-competes.

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