Friday, October 28, 2016

A Turning Point on the Use of Non-Compete Agreements

I have a friend named Chris and a brother-in-law named Mike.

Both are great salesmen. They are likable, great with clients, and work either in a personal services or technology business. They have moved jobs, though, fairly frequently over the time I've known them. They're in demand, rightfully so. They're smart and good at what they do.

And both steadfastly refuse, ever, to sign a non-compete agreement. It hasn't hurt them a damn bit.


Why do I bring this up? Well, first, many people I work with are just like Mike and Chris. Yet only a fraction take the approach my friends do. Just because an employer or prospective employer asks you to sign a non-compete doesn't mean you should. People aren't sheep, and we're not fungible commodities. Many people are afraid of confrontation. However, employers do not have all the leverage, even if it might appear that way. Though some may claim to need a non-compete of some kind, there's always room to negotiate and often times room to refuse to sign altogether. If the agreement's non-negotiable, then maybe you're better off finding a job elsewhere. Who'd want to work for that company?

Those are entirely reasonable approaches, and a great many employees have the ability to pick and choose among good and bad employers. People like Chris and Mike.

But not all do. Some people don't have marketable skills, are just entering the workforce, or face a shortage in the potential firms able to offer a decent job at a decent salary. And in those circumstances, bargaining power goes down. Dramatically. An employee may subjectively know she shouldn't sign a non-compete, but truth be told, she needs the f*cking job.

There are probably more people like that than there are workers like Chris and Mike. When it comes to non-competes, they live and work in the shadows.


It is these shadow employees that leads us, in my opinion, to a pivotal moment in how firms use non-competes, let alone enforce them. There's a move afoot by state attorneys general to police the overuse of non-compete agreements, as we've seen with the Jimmy John's fiasco and Eric Schneidermann's efforts in New York to stop the anti-competitive madness. There may even be a path for individual "private attorneys general" to do the same sort of thing under state deceptive trade practices law - with the prospect of fee recovery there for the taking.

Throughout my time writing this blog, I've advocated for reform. But the complex nature of non-compete law means that incremental reform is how the ball must get rolling. In Illinois, the General Assembly and Governor Bruce Rauner passed common-sense legislation that banned non-compete agreements for low-wage workers. This is the ideal sort of starting point to clear out some of the underbrush.

The White House added a new substantive layer to the reform discussion this week by urging state lawmakers to adopt meaningful changes to non-compete law. This initiative is somewhat remarkable, because there's really no suggestion that federal legislation is on the way. (The proposed MOVE Act, which is limited in scope, has gone nowhere. My post from last year discussing the legislation, a direct response to the Jimmy John's imbroglio, is available here.) Instead, the federal government is calling on state lawmakers to act and implement best practices with regard to non-compete law.

Those best practices cover three basic areas:

  1. Ban non-competes for certain classes of employees. According to the White House, classes would include "low-wage" workers, those who work in occupations that "promote public health and safety," those without access to trade secrets, and those who are laid off or terminated without cause.
  2. Improve transparency. This approach would advocate for upfront disclosure about non-competes before the start of the employment relationship and to require some tangible consideration (such as garden-leave or a signing bonus) beyond the mere continuation of employment. Some states now - New Hampshire and Oregon - have implemented advance notice laws that help mitigate the adhesive nature of non-compete agreements and, in theory, enable workers to evaluate competing job offers before having a non-compete sprung on them when they start work. 
  3. Incentivize fair drafting. The White House has promoted the "red pencil" doctrine, which would void an entire agreement if certain provisions are unenforceable. This approach would prevent an employer from stepping back into a reasonable contract it could have drafted but chose not to. As my prior posts illustrate, state law is all over the map with regard to partial enforcement of overbroad non-competes.
In my opinion, these reforms are spot on. My advice to state lawmakers would be to prioritize the areas the White House has identified, with an immediate focus on banning non-competes for low-wage workers, similar to what Illinois has accomplished, and those terminated without "cause," as defined consistent with other employment provisions in state law (e.g., eligibility for unemployment compensation). Once we've made progress in those areas, states can turn their attention to implementing more nuanced reforms - such as requiring garden-leave clauses, limiting the ability of judges to "equitably reform" overbroad contracts, and outlawing non-competes for certain types of industries.


For further information, please read Russell Beck's comprehensive post (with great links) at Fair Competition Law. The White House's Policymakers' Guide to State Policies is very well-done, readable, and hits all the major discussion points.

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