Federal Legislators Propose Noncompete Ban

On April 26, Senators Elizabeth Warren (D-MA), Chris Murphy (D-CT), and Ron Wyden (D-OR) introduced the Workforce Mobility Act to impose a federal ban on the use of employee noncompetes.

A companion bill was introduced in the House by Representatives Joseph Crowley (D-NY), Linda Sanchez (D-CA), Mark Pocan (D-WI), Keith Ellison (D-MN), Jerrold Nadler (D-NY), and David Cicilline (D-RI), who have since been joined by Janice Schakowsky (D-IL), and Alan Lowenthal (D-CA).

Although the Senate version is not yet publicly available, the text of the analogue House bill (H.R. 5631) is available here. The two bills are largely the same, although they differ in some respects. (More to come on that once the text is public.)

Substance of the Bill

The bill, if passed, would ban the use of employee noncompetes (and potentially nonsolicitation agreements). Specifically, the bill provides, in relevant part:

No employer shall enter into a covenant not to compete with any employee of such employer, who in any workweek is engaged in commerce or in the production of goods for commerce (or is employed in an enterprise engaged in commerce or in the production of goods for commerce).

“Covenant not to compete” is defined as follows:

[A]n agreement between an employer and an employee that restricts such employee from performing—

(A) any work for another employer for a specified period of time;

(B) any work in a specified geographical area; or

(C) any work for another employer that is similar to such employee’s work for the employer that is a party to such agreement.

Given that definition, an argument can be made that the ban covers not just employee noncompetition agreements, but nonsolicitation agreements as well.

The bill does give an out, however (assuming a company is willing to take the chance that it has engaged in anticompetitive activities – which the bill says is to be presumed):

A covenant not to compete contained in an employment contract made between an employer and an employee is anticompetitive and violates the antitrust laws unless the employer establishes by a preponderance of the evidence that the covenant does not have an anticompetitive effect or that the pro-competitive effects outweigh the anticompetitive harm.

The bill also provides employees with a private right of action — including the recovery of punitive damages and attorneys’ fees:

Any person who fails to comply with section 2 shall be liable to any individual in an amount equal to the sum of—

(1) any actual damages sustained by the individual as a result of the failure;

(2) such amount of punitive damages as the court may allow; and

(3) in the case of any successful action to enforce any liability under this subsection, the costs of the action together with reasonable attorney’s fees as determined by the court.

The bill “was referred to the Committee on the Judiciary, and in addition to the Committee on Education and the Workforce, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.”

To date, there is no federal noncompete legislation (much less a ban). As you may recall, there were three noncompete bills introduced in Congress in 2016. (See Changing Trade Secrets | Noncompete Laws.) The goal of those bills was, primarily, to ban the use of noncompete for low-wage workers. (See, for example, the “Mobility and Opportunity for Vulnerable Employees Act” (or the “MOVE Act“).) None of the bills passed.

On the state side, only California, Oklahoma, and North Dakota ban the use of employee noncompetes. (See 50-state noncompete chart.) Every other state allows employee noncompete to some extent. Id.

My Comments

Policy is always the province of the legislators. My role is not to try to push them in one direction or another. Rather, I view it as simply to identify the issues raised by their plans and to assist with language when asked. Accordingly, my comments about a complete ban (fleshed out a bit more here) were and continue to be the following:

Although Silicon Valley’s success is touted as the product of California’s ban on noncompetes, that conclusion is entirely speculative. It’s based on only one aspect of California law — which Evan Starr’s study shows is largely ignored by employers. And, given that Oklahoma and North Dakota have the same ban, the ban cannot be the answer (alone, anyway).

Further, relying on the success of Silicon Valley as a poster child for a ban ignores (not just the above, but also) that the language of the California statute is not as clear as it’s often thought to be. Until 2008, when the California Supreme Court issued a decision in a case called Edwards v. Arthur Andersen, California courts (federal courts in particular) interpreted the California language to permit limited noncompetes. Even after Edwards, there remains some question about whether limited noncompetes can be used to protect trade secrets. One of the key issues, for example, involves whether agreements prohibiting the solicitation of customers are barred by the California statute.

Some other issues around whether it is wise to completely (as opposed to partially) ban noncompetes include those below.

First, an outright ban on noncompetes is likely to have significant unintended consequences. Specifically, banning noncompetes will diminish the protection of trade secrets, as well as likely increase the amount of trade secrets litigation. See California Trade Secrets Litigation Supplants Noncompete Litigation.

Trade secret theft has become an increasingly significant problem — leading to, among other things, the bi-partisan and almost unanimous passage of the Defend Trade Secrets Act in 2016.

Further, studies show that the biggest threat to trade secrets is departing employees. According to one of the studies, over half of employees admit to stealing information when they left a job. See More Than Half of Ex-Employees Admit to Stealing Company Data According to New Study,” N.Y. Times (Feb. 23, 2009). Other studies show consistent results. E.g., Dell End-User Security Survey 2017 (approximately 72 percent of employees are willing to share sensitive, confidential, or regulated company information); “What’s Yours Is Mine: How Employees are Putting Your Intellectual Property at Risk,” Symantec (Feb. 6, 2013) (“Half of the survey respondents say they have taken information, and 40 percent say they will use it in their new jobs.”); “Employee Theft: Are You Blind to It?,” CBS Money Watch (July 14, 2011) (“The U.S. Chamber of Commerce estimates that 75% of employees steal from the workplace and that most do so repeatedly.”).

Given these realities, properly (and narrowly) drafted noncompetes serve as a prophylactic protection on the use of trade secrets for a limited time by preventing the employee from working in a role that will put his/her prior employer’s trade secrets at risk (while permitting the employee to work in other non-threatening roles). The duration is typically designed to be balance being long enough for the employee to forget the specifics or for the value of the information to wane and short enough to limit the impacts of such a restriction on the employee. As a result, many companies rely on noncompetes to protect their trade secrets.

Second, getting rid of noncompetes will likely result in more trade secrets litigation. This is what seems to have happened in California, which has far more trade secrets litigation that any other state. And, trade secret litigation takes longer and costs much more money for all parties. (The Waymo v. Uber case was a high-profile example.)

Third, as Evan Starr has observed, the data relied on for the causative effects (as opposed to a correlation) of noncompete laws is preliminary (and not conclusive). SeeThe Incomplete Noncompete Picture (“Despite the rapidly expanding empirical literature, we argue that many of the most basic questions regarding the use and consequences of noncompetes remain either entirely unanswered or at least unsettled.”)

Although the example of Silicon Valley is frequently used to support banning noncompetes, it’s worth noting that Massachusetts (which enforces noncompetes) surpasses California in biotech, which is an industry that uses noncompetes extensively.

Fourth, here are a few additional data points:

  • While there has been a lot of media attention about the theoretical impact of noncompetes (and some states have imposed limits on their use), some states have passed laws to strengthen the enforceability of noncompetes. See Changing Trade Secrets | Noncompete Laws.
  • A handful of states have proposed complete bans in the past few years. None have passed.
    • Hawaii and Illinois came closest with a ban on their use in “a technology business” and for low-wage workers, respectively.
    • A few other states have joined with other states banning or limiting the use of noncompetes for physicians. (Massachusetts, for example, has banned them for doctors since the 70’s.)
  • The Obama White House — after months of discussions (in person and over the phone), research, and consideration — put out a Call to Action urging states to limit the use of noncompetes in several ways, including perhaps most importantly, (1) using them only to protect trade secrets, (2) banning them for certain categories of workers, including low-wage workers, and (3) forcing companies to use narrowly-tailored agreements by limiting how a court can “fix” an overly broad restriction.
    • Around the same time, Illinois passed legislation to ban the use of noncompetes for low-wage workers, and a number of other states have pending bills that would do that.
  • Noncompetes serve to protect companies from things other than the use of trade secrets. For example, they are frequently used to protect customer relationships in industries (like the recruiting industry) that rely on on-going customer relationships that they entrust to the employees.
  • Noncompetes are sometimes abused. The particularly egregious ones make the news. However, noncompetes do serve some business interests that most states recognize as legitimate. If you conclude that there is room for some noncompetes, there are ways to target the abuses (some of which were identified in the Call to Action).
Finally, if the legislators want to move forward with a ban, they may wish to permit the use of noncompetes only as a remedy for a violation of other protections that, in a particular circumstance, prove to be insufficient. For example, permit the enforcement of a noncompete where an employee has violated a nondisclosure agreement (which is expressly permitted) or where the employee has violated a nonsoliciation agreement. (We used this is some of the proposed legislation in Massachusetts that proposed a ban.)

What to do now? 

The good news is nothing that you need to do just yet.

That said, if you use noncompetes to protect your trade secrets and customer relationships, you will just need to have an action plan if this (or something like it) passes. Any action plan should have nondisclosure agreements, nonsolicitation agreements (to the extent applicable, necessary, and not banned), and any other restrictive covenants (no-raids, for example) that you need that don’t run afoul of the law.

Consider also using a springing noncompete. (I’m a big fan of those both for companies that feel that they can protect their legitimate business interests without relying on noncompetes and for states in which noncompetes are otherwise banned.)

In short, there are many things that companies can and should be doing regardless of the change — and it’s better to do them when you have time to consider your alternatives. That time is now.

It never hurts to make sure that what you already have in place is sufficient. I have seen way too many companies assume that their agreements, policies, and procedures are sufficient, only to find out when they need them that they are insufficient and should have been updated long ago.

My advice: Take the time to check now, while you have the time. You can fix any existing problems and be ready for any changes all at once.

An ounce of prevention … A stitch in time… You get the point.

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