May 29, 2019 Articles

Recent Trends in Noncompete Laws Across the U.S.

The trend in state legislation has been to allow for easier employee mobility.

By Amit Bindra

According to a research paper that relied on nationally representative survey data, about one in five employees in the U.S. labor force is bound by a noncompete. Companies desire to implement such agreements to protect their confidential and proprietary information.

Each state develops its own laws regarding these agreements. Last year, we discussed numerous changes to restrictive covenant, noncompete, and nonsolicitation laws across the United States. Due to the prevalence of these agreements, substantial legislative change continues to occur. At least one state has already modified its new law since the last publication. Furthermore, litigation related to these agreements results in judicial application of the laws that adds new guidance to the area of noncompetes. 

Idaho: Burden on Employers

The trend amongst states has been to pass laws to allow for easier employee mobility. This is now true of Idaho, too, after a period in which the state favored employers with regard to noncompete agreements.

Unlike most states, Idaho in 2016 passed a law to ease the enforcement of noncompete agreements. Under the law, if a “key” employee or an independent contractor violated a noncompete agreement, there was a “rebuttable presumption of irreparable harm.” This shifted the burden to the employee or independent contractor to establish that the employer’s legitimate business interests were not harmed.

But in 2018, Idaho passed another law to strike the 2016 provision, shifting the burden back to employers to establish that an employee’s or independent contractor’s alleged conduct harmed the employer’s legitimate business interest.

Colorado: Noncompetes and Physicians

Some states have passed laws that exempt physicians and medical providers from restrictive covenant agreements. Legislatures believe that this is necessary to ensure that patients can receive continuous patient care. Policymakers want to ensure that patients can seek treatment with physicians when there is a shortage of doctors in a specialized area of medicine.

In Colorado, agreements that restrict a physician from practicing medicine are not enforceable, but employers can enter into agreements with physicians requiring the physicians to pay damages related to competition. In 2018, however, Colorado passed a law exempting certain physicians from such damages. The new Colorado law allows physicians that are leaving a medical practice to provide their new contact information to any patient they were treating with a “rare disorder.”

Massachusetts: Major Restrictions on Noncompetes

Likely, the biggest legislative change occurred in Massachusetts. In 2018, Massachusetts passed significant legislation to prohibit noncompete agreements unless certain statutory requirements are met. Under the new law, noncompete agreements entered into after October 1, 2018, are not enforceable if the employee is (i) nonexempt under the Fair Labor Standards Act (FSLA), (ii) terminated without cause, (iii) 18 years old or younger, or (iv) a student or intern. This new law does not apply to agreements that are made in connection with a sale of a business or to certain separation agreements, confidentiality or nondisclosure agreements, or nonsolicitation agreements.

The law mandates new requirements to make noncompete agreements enforceable. The agreement must be in writing and be signed by both the employer and employee, and the employer must advise the employee to consult with an attorney before signing the agreement. The employer must also provide a copy of the agreement to the employee before making a formal offer, or provide the agreement 10 days before the employee starts working. If an employer requires an employee to sign a noncompete during the employment, then the employer must provide at least 10 business days before the agreement is effective, and an employer will have to provide new consideration (in addition to just the employment).

With certain exceptions, noncompetes will not be enforceable if the postemployment restriction is longer than one year. This restriction can be two years if the employee breaches fiduciary duties or possesses the employer’s property.

The law also includes geographic restrictions. A noncompete is presumed reasonable if it is limited to the geographic areas in which the employee provided services or had a material presence for the last two years of the employee’s job, and if the agreement is limited to the services that the employee provided during those two years.

A noncompete agreement is enforceable only if it protects at least one of three legitimate business interests: trade secrets, confidential information, or an employer’s goodwill.

Employers must provide “garden leave” or other consideration to an employee. In other words, the employer must pay the employee at least 50 percent of the employee’s highest salary over the last two years of the employment.

The law also limits choice-of-law clauses, as a lawsuit must be filed either in the county in which the employee lives or in Suffolk County, Massachusetts.

Wisconsin: Judicial Application to Nonsolicitation

In addition to legislative change, judicial interpretations of laws provide added guidance in the area of noncompetes. For example, the Wisconsin Supreme Court recently held in Manitowoc v. Lanning that a Wisconsin statute that restricts restrictive covenants in employment contracts also applies to clauses that restrict the solicitation of coworkers. 906 N.W.2d 130 (Wis. 2018).

Future Legislation

There are additional laws at the federal and state level on the horizon. Democratic senators and House representatives proposed the Workplace Mobility Act and a companion bill to ban the use of noncompete agreements. Several states have also proposed noncompete laws to protect low-wage workers or to otherwise allow for employee mobility.

Conclusion

Because of the continuous evolution of restrictive covenant law, it will be critical to monitor these legislative and judicial trends.

Amit Bindra is a partner at The Prinz Law Firm, P.C., in Chicago, Illinois, and an adjunct professor at Loyola University Chicago School of Law. 


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