May 31, 2017 Articles

Post-Election Non-Compete Update

With silence on the federal front, states continue to take diverging approaches.

By Robin Morse

Although the recent presidential election in the United States has had profound effects on many areas of law, one that has received less attention is the field of noncompetition laws. Noncompetition agreements are controversial because they pit employers’ need to protect confidential information and business relationships against employees’ rights to enjoy worker mobility. This article provides a brief overview of the Obama administration’s efforts on non-compete reform and analyzes non-compete developments since the recent presidential election.

Although non-competes are traditionally solidly within the purview of the states, the Obama administration took up non-compete reform as something of a signature issue last year, siding decidedly with employees and critics of non-competes. In May 2016, the Obama administration issued a report, Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses, drawing on a report from the U.S. Treasury Department’s Office of Economic Policy to provide an overview of research on the effects of non-competes as well as states’ efforts to limit their negative consequences. The report highlighted ways in which some workers may be disadvantaged by non-competes and concluded that although non-competes may play an important role in protecting businesses and encouraging innovation and investment in employees, if used improperly, they can impose significant costs on workers, consumers, and the economy. In October 2016, the Obama administration followed up with a “State Call to Action,” encouraging lawmakers to reduce the misuse of non-compete agreements by banning them for certain categories of workers such as low-wage workers, requiring consideration beyond continued employment for signing a non-compete, and considering the use of the “red pencil doctrine,” which renders a contract with unenforceable provisions void in its entirety.

Under the Trump administration, in contrast, there has been silence on the issue of non-competes, and any further federal intervention in the area seems highly unlikely at this time. A search of the current White House website reveals that the two guidance documents issued by the Obama administration described above appear to be no longer available. In fact, the current White House website seems to be completely devoid of any references to non-competition agreements. In the wake of the election and in the absence of any further federal guidance, courts and legislatures have continued to take varying approaches to non-competition agreements.

In recent months, New York and California have both taken steps in line with the Obama administration’s exhortations to limit the use of non-competes. In New York, the Supreme Court Appellate Division for the First Department recently affirmed that non-competes “are not enforceable if the employer (plaintiff) does not demonstrate continued willingness to employ the party covenanting not to compete.” Buchanan Capital Mkts., LLC v DeLucca, 41 N.Y.S.3d 229 (N.Y. App. Div. Nov. 15, 2016) (internal quotation marks and citation omitted). Whether employers can enforce non-competes against discharged employees varies significantly from state to state. This area of law is considered to be somewhat unsettled in New York, and the recent decision provides discharged employees with important ammunition in avoiding enforcement of their non-competes.

In California, a new law went into effect on January 1, S.B. 1241, prohibiting employers from requiring employees who primarily reside and work in California to sign forum selection or choice-of-law provisions as a condition of employment. Significantly, California is one of three states in which non-competes are generally unenforceable. Now the new statute takes California’s hostility toward non-competes even further by preventing employers from contracting around the state’s general prohibition on non-competes.

At the other end of the spectrum, courts in New Jersey and Tennessee have shown continued willingness to enforce noncompetition and non-solicitation agreements to protect employers’ confidential information and customer goodwill. In New Jersey, a federal court recently held that a packaging manufacturer was entitled to a preliminary injunction to protect its customer goodwill. In Menasha Packaging Co., LLC v. Pratt Indus., No. 17-0075 (D.N.J. Feb. 15, 2017), the district court enjoined three former employees from working on a customer account for the plaintiff’s competitor for 18 months due to their heavy involvement with the customer while employed by the plaintiff. Although applying Illinois law, the district court stated that it would have arrived at the same result under New Jersey law.

In Tennessee, a federal court recently rejected a defendant’s selective enforcement defense in a discovery ruling under Ohio law. Under the selective enforcement defense, which has been recognized by various courts around the country, selective enforcement of varying non-compete clauses among employees working a similar level may lead to a waiver of the full effect of a non-compete agreement. In GCA Services Group, Inc. v. ParCou, LLC, No. 2:16-cv-02251-STA-cgc (W.D. Tenn. Dec. 12, 2016), however, the district court held that the defendant had not demonstrated that a party sued for breach of a non-compete could raise selective enforcement as an affirmative defense under Ohio law and was thus not entitled to information regarding the plaintiff’s previous attempts to enforce non-competes.

Meanwhile, recent efforts to legislate the use of non-competes have had varying degrees of success. In 2016, several states—Connecticut, Illinois, Rhode Island, and Utah—enacted laws restricting the use of non-competes. In Massachusetts, legislators took up the issue of non-competes and decided to preserve the status quo and leave it to the courts for the time being. This year, proposed bills have begun to make their way through the legislative process in a number of states. In particular, proposed laws in Maryland and Washington have appeared to gain some traction as they have each passed their respective state’s house and are under consideration by the state senate. In Maryland, H.B. 506 would invalidate non-competes restricting employees who earn equal to or less than $15 per hour or $31,200 per year. In Washington, H.B. 1967 would require that all the terms of a non-compete be disclosed in writing before the employee signs the contract.

These diverging cases and legislation demonstrate the breadth of states’ approaches to non-competes and suggest that there is no clear trend on non-compete enforcement. With dormancy expected on the federal non-compete front for the next four years, it remains to be seen whether the efforts of the Obama administration will have any sort of lasting impact on the non-compete climate across the country or will fade into history as states continue to take diverging approaches to non-compete law.

Robin Morse – May 31, 2017