Resources

Client Alerts, News Articles, Blog Posts, & Multimedia

Everything you need to know about BMD and the industry.

Non-compete Agreements are Under Fire: What Employers Need to Know

Blog Post

Non-compete agreements are an ongoing topic of dispute. Employers and their advocates point to the efficacy of non-competes in protecting proprietary information. Employees and their advocates argue about worker mobility and that employers unduly burden workers’ ability to seek better jobs.

The Biden administration has put forth its position, and state legislatures have introduced bills addressing the enforceability of non-competes.

Here is what you need to know:

Why we have non-compete agreements

Employers rely on non-compete agreements to keep proprietary advantages out of competitor’s hands. Noncompetition agreements are intended to protect a business’s trade secrets, along with their investment in specialized training, proprietary methods and information, and customer goodwill that it has developed over time.

To protect these interests, non-compete agreements typically operate to prevent a former employee from working with a direct competitor. Executing non-compete agreements has become standard operating procedure for a number of businesses bringing on new hires.

The movement to restrict or ban non-compete agreements

The impetus to restrict or prohibit non-compete agreements is not new. Both the Obama Administration and the Trump Administration entertained the idea. In July 2021, President Biden expressed his intention to curtail the prevalence of noncompetition agreements with an Executive Order on Promoting Competition in the American Economy.

This renewed effort to curtail non-compete agreements is in response to the perceived problem that employers are unduly burdening employee mobility by executing non-compete agreements with virtually every employee — irrespective of position and privity to confidential information. Opponents of non-compete agreements argue that employers abuse non-compete agreements to prevent employees from leaving to take higher-paying jobs.

Opponents often point to extreme cases like that of fast-food restaurants — where sandwich shop employers attempt to enforce non-compete agreements against former low-wage workers who have gone to a competitor.

These examples are effectively used to demonstrate an actual and/or perceived threat to low-wage worker mobility and have spurred the push for change in the restrictive covenant sphere.

It is because of this misuse of non-compete agreements by a few that employers that rely on non-compete agreements to protect bona fide business interests are now on the radar.

Enforceability issues relating to an outright federal ban on non-compete agreements

Traditionally, non-compete agreements have been regulated by state law. After President Biden’s Executive Order, tasking the Federal Trade Commission (FTC) with non-compete reform, there has been discussion of a federal ban on non-compete agreements.

However, such a ban is not imminent and would otherwise be subject to legal attacks. Any outright ban on non-compete agreements by the FTC would likely be challenged on the grounds that it violates the Contract Clause of the U.S. Constitution and that such an attempt to broadly grant this power to the FTC is unconstitutional under the Non-delegation Doctrine.

While a federal ban is unlikely, state legislators across the country have introduced bills to restrict enforceability of non-competes. State legislative restrictions on the enforceability of non-compete agreements are more likely to be upheld by the courts.

As such, the passage of new restrictions or limitations on non-compete agreements by the state legislatures can have far-reaching implications.

Potential unintended consequences from non-compete restrictions

Restrictions on non-compete agreements, despite being intended to benefit employees, may operate to their detriment. If employers no longer have the ability to use non-compete agreements as a tool to protect their proprietary information — and otherwise prevent current employees from departing and working for a competitor — employers may be disincentivized to invest in employee development, offer proprietary training techniques, and pay for top talent.

Similarly, employers may be more skeptical in hiring processes because of the increased opportunity for corporate espionage and employee poaching that comes with limiting the enforceability of non-compete agreements.

Litigation over other forms of restrictive covenants (e.g., non-solicitation agreements and confidentiality agreements) may increase as non-compete agreements are limited. If non-compete agreements become less effective at protecting employers’ proprietary interests, businesses may turn to other types of restrictive covenants to protect the same. However, where employers are trying to protect the same interests, but with different instruments, a grey area is certain to result. And, in the context of a dispute, grey area almost always leads to litigation.

So, how should employers act to protect proprietary information and assets moving forward?

To be sure, non-compete agreements are not the only restrictive covenant that employers can use to protect their proprietary information. While non-compete agreements are certainly alive and well in many states, employers should shore up the other forms of restrictive covenants – namely, their non-solicitation and confidentiality agreements.

Unlike non-compete agreements, non-solicitation agreements and confidentiality agreements are not under attack. Thus, they can be used as tools to help protect the dissemination of an employer’s proprietary information. Employers would benefit from getting their legal counsel to review/revise their non-solicitation and confidentiality agreements to ensure their proprietary advantages remain protected.

Undoubtedly, the practical aspect of enforcing non-solicitation and confidentiality agreements presents its own unique challenges. Unlike litigating non-compete agreements (where it is generally fairly clear whether a former employee is working for a competitor within the restricted territory), whether a former employee is actively soliciting the former employer’s customers/patients/clients, etc. or is disclosing confidential information becomes more nuanced from a proof perspective.

As such, should there be additional restrictions on non-compete agreements, employers utilizing the remaining tools of non-solicitation and confidentiality agreements should anticipate challenges in enforcing the same. However, this should not dissuade employers from taking steps to ensure that their non-solicitation and confidentiality agreements are up to date. Moreover, employers should update their policies relating to the handling of confidential information.

Finally, employers should update their policies relating to offboarding employees to ensure that no confidential information has been transmitted in the weeks leading up to the termination.

If you have questions or need assistance with non-compete agreements either as an employer or employee, Member Josh La Bouef would be happy to assist you with your situation. Contact Josh at jrlabouef@bmdpl.com.


Invitation to Banks & Family Office/Ultra-high Net Worth Investors Exploring Cannabis Lending to Join Our Informal Institutional Cannabis Lenders Community

An update on the latest developments in the cannabis banking/lending space by subject matter expert, BMD Scottsdale/Phoenix Office Managing Partner Stephen Lenn

Community Banks: Collaboration, not isolation, is the key to protecting/ enhancing the cannabis business you pioneered

As we prepare for the plenary session of the informal institutional cannabis lenders community announced in my previous article, I am pleased to advise that participants now include 5 of the best-known dedicated loan funds; a select group of commercial banks ranging in size from single state community banks to mid-size regionals making cannabis loans into the mid-8 figures; and, a syndicator of credit union cannabis loans.

BMD’s Jason Butterworth Quietly Engineers Some of Akron’s Most Impactful Projects

Jason Butterworth, a team member of BMD’s Business & Corporate practice, focuses his practice on finance, real estate, and tax credit law.

Celebration of Asian American and Pacific Islander Heritage Month

In recognition of Asian American and Pacific Islander Heritage Month (AAPI Heritage Month), Brennan Manna and Diamond is proud to recognize the contributions and achievements of our AAPI members.

Fluresh Cannabis’ Bank Loan: Moving Into the Mainstream

The announcement by Fluresh, a vertically integrated Michigan based cannabis business, of the closing of loans from a federally insured commercial bank totaling almost $50 million represents an important landmark for both Fluresh and the cannabis industry writ large. For Fluresh, perhaps as important as the bottom-line benefits of lower cost financing, the fact that its operations and financials passed muster with a substantial commercial bank can be regarded as an important rite of passage. For the industry, it reflects its inexorable movement out of the shadows and into the mainstream. This substantiates the view that, whether or not any of pending the federal legislation is enacted, bank lending to the cannabis industry will continue to accelerate.