NON-COMPETE AGREEMENTS UNDER ASSAULT

In my blog of May 26, 2016, I discussed a report released by the White House, highly critical of the non-compete agreements commonly used by American employers.  I noted at the time that the Administration could not take any direct action, because such agreements are governed under the individual laws of each state, and are not governed by federal law.  However, the report made it clear that the White House intended to:

[I]dentify key areas where implementation and enforcement of non-competes may present issues, examine promising practices in states, and identify the best approaches for policy reform”, suggesting plans to lobby state legislators and policymakers in the individual states.

It appears that the White House’s efforts already have borne fruit in the President’s home state of Illinois. Earlier this month, Illinois Governor Bruce Rauner signed into law the “Illinois Freedom to Work Act”, which will go into effect January 1, 2017.  The Act would prohibit employers from requiring employees to sign non-compete agreements if they make less than $13 per hour.  The new law is not supposed to have any effect on the enforceability of confidentiality agreements designed to protect trade secrets or other confidential business information.

The recent uproar over non-competes began over a sandwich, or more accurately, a sandwich maker.  Back in 2014, I reported how sandwich chain Jimmy John’s had attracted some unwelcome attention by requiring low-level employees to sign two-year non-compete agreements as a condition of employment.  After the story first broke nationally, Congressional Democrats sent a letter to the Federal Trade Commission (“FTC”)  and the U.S. Department of Labor (“DOL”), describing the restrictive covenants as “clearly anti-competitive and intimidating to workers.” The House Democrats asked for the FTC and the DOL to investigate the sandwich chain. 

Illinois Attorney General Lisa Madigan upped the ante, and on June 8, 2016, filed a lawsuit against Jimmy John’s, alleging the sandwich maker’s non-compete agreements were illegal under Illinois law “[b]y locking low-wage workers into their jobs and prohibiting them from seeking better paying jobs elsewhere, the companies have no reason to increase their wages or benefits.” Under Illinois law, non-compete agreements must be premised on a legitimate business interest and narrowly tailored in terms of time, activity and place. The State of New York was apparently about to take similar legal action, however, Jimmy John’s reached an agreement in June with New York Attorney General Attorney General Eric Schneiderman, in which the sandwich chain agreed to stop including sample non-compete agreements in hiring packets it sends to its franchisees. Jimmy John’s also agreed to inform its New York franchisees that the Attorney General has concluded the non-compete agreements are unlawful and should be voided.

It bears mention that in New York and Illinois, and most other states, non-compete agreements, in of themselves, are not illegal and are enforceable under the appropriate circumstances.  The real focus here, and the basis for the hostility from elected officials, is requiring low-level and low-paid employees to sign such agreements without a legitimate business purpose.  I anticipate more states will be taking legislative action similar to the new Illinois law.

While such restrictive employment covenants are generally not favored by the courts, they will be enforced if the terms of the agreement are reasonable under the particular circumstances.  Generally, there are three requirements: (1) the employer has a valid interest to protect; (2) the geographic restriction is not overly broad; and (3) a reasonable time limit is given.  The employer bears the burden of proving the reasonableness of the agreement.  The reason these types of agreements are construed very narrowly is that most courts recognize that an employer is not entitled to protection against ordinary competition from a departing employee.  Non-compete agreements can be valuable tools to protect an employer’s legitimate business interests, but generally, it is inadvisable to have low level employees sign such agreements, because they are typically not going to possess the confidential information that would warrant enforcement of the agreement. 

In most of the matters I’ve handled involving non-compete agreements, the employees in question were either highly trained individuals in technical or creative fields, with direct access to their employer’s trade secrets, or were high level sales people with similar access to confidential customer information.  I would be hard pressed to come up with a scenario where a fast food employer would legitimately need  to have a crew worker enter into a non-compete agreement, no matter how good the sandwich.

The lesson to be learned is that the use of these agreements should be confined to key employees whose knowledge of trade secrets and other confidential information could cause serious damage if they went to work for a competitor.  In light of the recently enacted federal Defend Trade Secrets Act ("DTSA") of 2016, businesses now have greater protection, but need to take affirmative steps as soon as possible to take advantage of all the provisions of the new law.  For more information on DTSA, see my recent article in the Mississippi Business Journal.