White House Releases Noncompete Call to Action

whitehouse_historypgEarlier today (October 25, 2016), the White House announced a new initiative to spur competition in the labor market.

As part of its new initiative, the White House issued a report entitled, “Non-Compete Reform: A Policymaker’s Guide to State Policies,” together with a Call to Action on noncompetes.

First the background. Earlier this year, the White House and Treasury Department each released reports (Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses and Non-compete Contracts: Economic Effects and Policy Implications, respectively) finding both overuse and misuse of noncompete agreements.

Both studies relied in part on my 50 State Noncompete Laws chart and survey of the growth of noncompete and trade secrets cases, as well as the work of Evan StarrNorman BisharaJJ PrescottMatt MarxDeborah Strumsky, and Lee Fleming.

Following that report, I was invited to participate in the working group discussions mentioned in the White House’s report. (I was the only private practice attorney to participate.) The result was the Call to Action announced today.

The Call to Action makes the following three suggestions:

  1. Ban non-compete clauses for categories of workers, such as workers under a certain wage threshold; workers in certain occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or those who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause.
  2. Improve transparency and fairness of non-compete agreements by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted (because an applicant who has accepted an offer and declined other positions may have less bargaining power); providing consideration over and above continued employment for workers who sign non-compete agreements; or encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work.
  3. Incentivize employers to write enforceable contracts, and encourage the elimination of unenforceable provisions by, for example, promoting the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.

As explained by the White House in its fact sheet,

“To contextualize these best practices, the White House is releasing a state-by-state report on key dimensions of current state non-compete policy. Finally, we are announcing commitments to undertake the largest data collection of its kind to better measure non-compete usage by firms and individuals, alike.”

This state-by-state report relies in part on my 50 State Noncompete Survey – first of its kind and updated regularly since 2010 to reflect ongoing developments in the laws around the country – as well as a similar one (that was later prepared by Seyfarth Shaw).

Whether you agree with all of the White House’s suggestions or not, the Call to Action represents a considered balance of myriad competing interests. It is no easy task to satisfy everyone, and no doubt states will vary on which of these recommendations they choose.

For example, states may wish to use a softer version of the red pencil rule. A rule that at the Massachusetts legislature has come to be known as the “Purple Pencil” rule. Like the red pencil rule, the purple pencil rule requires the entire noncompete to be stricken if any portion of it is overly broad. However, unlike the red pencil rule, under the purple pencil rule, if a company made an objectively good faith effort to draft the particular noncompete narrowly, the court can remedy any over breadth by reforming (i.e., rewriting) the offending portions of the agreement. This purple pencil rule has not yet been adopted in any state, though I had developed it for the Massachusetts legislature (and it had been included in some of the bills) as a means to encourage narrow drafting on noncompetes, while not creating a “gotcha” trap for companies that try to comply with the law.

Similarly, states may wish to permit (or encourage) the use of “springing noncompetes,” i.e., the imposition of a noncompete as a remedy for a former employee’s breach of other, less onerous, restrictions (such as nonsolicitation agreements and nondisclosure agreements). This is a concept that I had developed for a few clients that preferred to use nonsolicitation, nondisclosure, and no-raid agreements rather than noncompetes, but still wanted the protections offered by noncompetes for any employee who turned out to not be trustworthy, as exemplified by the employee’s breach of one of the other restrictive covenants. The concept of the springing noncompete has been included in some of the proposed legislation in Massachusetts.

Regardless of whether states adopt all, some, or none of the White House’s suggestions, the Call to Action represents an important step forward in the national dialogue on how to curb overuse and abuse of noncompetes and limit their use to the protection of legitimate business interests for which they were designed.

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