Last week brought several interesting developments on the issue of restrictive covenants and hiring of employees among competitors including 1) the White House’s call to action (CTA) for the States to restrict use of covenants not to compete; 2) the Department of Justice’s announcement that it intends to criminally prosecute employers and executives entering into wage-fixing and no-poaching agreements; and 3) a new case from a Texas court discussing the enforceability of noncompetition agreements based on the promise to provide specialized training and does not include confidential information. This week, I intend to address each of these developments.
First, the White House issued its CTA to state legislatures and policy makers calling on those bodies to enact reform designed to reduce or eliminate the use of non-compete agreements in employment. The CTA builds on a report issued by the White House and U.S. Treasury Department report that found that non-compete agreements constituted an institutional factor that had the potential to hold back wages and entrepreneurship by banning workers from starting a company or going to work for a competitor for a period of time after leaving employment. According to the CTA, 30 million Americans (1 in 5 workers) are impacted by non-compete agreements. It is the position of the present administration that “most workers should not be covered by a non-compete agreement.”
The CTA called on the states to reduce the misuse of non-compete agreements to adopt what it terms are “best-practice policy objectives” that include:
- Banning non-competition agreements for large categories of workers including occupations that promote public health and safety; workers unlikely to possess trade secrets; and workers suffering undue adverse impact of non-competes like workers laid off or terminated without cause
- Requiring, as an element of enforceability, that the non-compete be proposed before a job offer or promotion is accepted; providing consideration above and beyond continued employment and require employers to better inform workers about the law of the state and the existence of non-compete contracts and how they work
- Incentivizing employers to draft enforceable contracts and encourage elimination of unenforceable non-competes by proposing use of “red pencil doctrine” that would void (rather than merely reforming) non-competes with unenforceable provisions
- Add appropriate remedies or penalties for employers that do not comply with state non-compete statutes
- Encourage use of alternative restrictive covenants like nondisclosure and nonsolicitation agreements rather than non-compete agreements
Other policy documents issued by the White House along with the CTA include:
While the CTA focuses attention on an issue that rarely get significant attention, I do not expect it to have a persuasive effect on the Texas legislature for at least several legislative sessions and the use of narrowly tailored non-compete agreements will continue to be used by Texas employers.