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    June 02, 2023

    Non-Compete Agreements: The Trend Toward Obscurity?

    Michael D. Schmidt

    With some exception, non-compete agreements have historically been enforced by courts if reasonably tailored to protect legitimate business interests. However, recent developments on the federal and state levels suggest that businesses may have an increasing difficulty in enforcing non-compete agreements.

    For some contextual background, former President Obama issued a state callto-action in October 2016 involving non-compete agreements. The initiative was premised on the concern that non-compete agreements inappropriately limit worker mobility (particularly for lower wage earners), and unduly suppress the labor market and wages. Since then, and continuing through the current Biden administration, the federal government has taken steps to address the enforceability of non-competes. 

    In just the first quarter of this year, administrative and legislative efforts have been noteworthy. On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would ban employers from imposing non-competes on their workers, with limited exceptions. The proposed rule is based on the FTC’s finding that non-competes constitute an unfair method of competition in violation of Section 5 of the FTC Act. To address such alleged violations, the FTC’s proposed rule would generally prohibit employers from (1) entering into or attempting to enter into a non-compete with a worker; (2) maintaining a non-compete with a worker; or (3) representing to a worker, under certain circumstances, that the worker is subject to a non-compete. While the proposed rule is technically limited to non-compete agreements, other restrictive covenant agreements could be subject to the rule where such agreements are so broad in scope that they function as a “de facto” non-compete. As such, employers should ensure that agreements involving non-disclosure and/or non-solicitation restrictions are narrow enough to avoid falling under the purview of the FTC’s proposed ban.

    The FTC’s proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. Moreover, the proposed rule would require employers to rescind existing non-compete agreements entered into before the proposed rule’s effective date, and inform workers that such agreements are no longer in effect. From a procedural standpoint, the rule is currently in the public comment period through April 19, 2023, after which the FTC will either publish a final rule that modifies the initial proposed rule based on comments received, publish a final rule that virtually mirrors the initial rule, or scrap the idea altogether (the least likely of outcomes). With any final rule, there is likely to be significant litigation focused on, among other issues, the FTC’s rulemaking authority to regulate this area in the first place.

    Clearly off the momentum from the FTC’s proposed rule, in February 2023, a group of senators introduced the Workforce Mobility Act of 2023 (WMA). Like the FTC’s proposed rule, the WMA would prevent any person or business engaged in interstate commerce anywhere in the country from entering into, enforcing, or attempting to enforce a non-compete agreement. Employers would also be required to conspicuously post notices informing workers of the ban on non-compete agreements. While the FTC’s proposed rule and the WMA are similar, the WMA would not apply retroactively. The WMA has not seen much traction, although President Biden would likely sign the legislation if passed. Recent federal initiatives notwithstanding, the enforceability of non-compete agreements has historically been addressed more on the state and local levels, where there have been significant developments in recent years and a discernible trend toward limiting non-compete agreements in most circumstances. For example, in January 2022, Illinois amended its Freedom to Work Act to prohibit non-compete agreements for employees earning $75,000 or less. That amendment accounts for prospective rates of inflation, noting that the threshold requirement will increase by roughly $5,000 every few years through 2037.

    Additionally, the Illinois law impacts non-solicitation agreements insofar as it prohibits customer and co-worker non-solicitation agreements for employees earning $45,000 or less per year. In August 2022, Colorado revised its non-compete laws to provide that non-compete agreements will only be enforceable if (1) entered into with a “highly compensated worker” (i.e., a worker making at least $112,500 in 2023); (2) designed to protect trade secrets; and (3) no broader than necessary to protect the employer’s legitimate interest in protecting trade secrets. Colorado also now will enforce a non-solicitation agreement only where it is (1) entered into with workers making at least sixty percent of the threshold amount for highly compensated workers (i.e., a worker making at least $67,500 in 2023); and (2) no broader than necessary to protect the employer’s legitimate interest in protecting trade secrets. Oregon and Nevada also recently amended their non-compete statutes. Oregon reduced the maximum term of a non-compete from 18 months to 12 months, while Nevada law now provides that non-compete agreements are void as applied to hourly workers. Moreover, recent case law demonstrates courts’ growing disinclination towards non-compete agreements. Only a few months ago, the Delaware Chancery Court struck an entire non-compete clause in Kodiak Bldg. Partners, LLC v. Adams. Kodiak operated four business lines in 81 locations and 16 states. The non-compete agreement at issue prohibited the employee for a 30-month period of time from participating in the management or control of any business similar to Kodiak’s “Business,” broadly defined to include all of Kodiak’s various businesses regarding trusses, roofs, floors, stairs, etc. The employee subsequently joined a competing truss business, and Kodiak filed suit pursuant to the non-compete agreement. The Court struck the non-compete in its entirety, finding that the non-compete was overly broad where it encompassed all of Kodiak’s business lines, rather than the specific truss business line which the employee joined. As such, the non-compete was more restrictive than necessary to protect Kodiak’s legitimate business interests.

    It is imperative that employers who utilize restrictive covenant agreements, and those who look to hire workers who may be subject to such agreements, stay abreast of developments in this area, particularly to the extent that the current patchwork of laws may impact practices of multi-jurisdictional businesses. In any case, and regardless of whether the FTC rule or the WMA become effective on a national level to ban non-compete agreements across the board, it is also a good time for businesses to step back and identify the specific business interests that are necessary to protect, and consider the most appropriate, and least restrictive means for accomplishing those goals. 

    Michael C. Schmidt

    Vice-Chair, Labor and Employment Department, Cozen O'Connor

    Michael C. Schmidt is the Vice-Chair of the Labor and Employment Department at Cozen O’Connor, and resides in New York, New York. He represents management in litigation and offers advice and counsel to clients on a wide range of employment law issues involving restrictive covenants, wage and hour issues, the ADA, FMLA, Title VII and other employmentrelated laws regulations. Mike also is the creator and host of his podcast “Employment Law Now,” which can be found on iTunes, Spotify and at www.employmentlawnow.com

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