2019 Wrap Up: States Continue to Limit the Enforceability of Employee Non-Competition Agreements
Most employers use contracts to protect their customer relationships and proprietary information from unfair competition by employees. They must. If they do not, they may lose their ownership rights in such business interests. If, for example, an employee is given access to an employer’s trade secrets without first being required to sign a non-disclosure agreement, an employer may not be able to prevent the employee’s use of such information on behalf of a competitor after the employee leaves. Similarly, a sales representative who is not bound by a customer non-solicitation agreement may be free to call on the same customers for a directly competitive business.
For more than a century, the law has recognized that employers are entitled to use these restrictions as necessary and reasonable protections against unfair competition by departed employees. However, in the past decade, the use of blanket non-competition agreements, which prohibit an employee from working for a competitor after the end of employment, has increasingly been forbidden or significantly restricted by state legislatures. This is because some employers have used non-competes as a cudgel to unfairly restrict employee movement, punish employees for leaving them, and bully smaller competitors.
Many states have passed laws restricting the use of non-competes by employers against low-wage earners, employees who are not exempt from overtime, employees who are laid off or discharged without cause, and interns and student learners. Laws restricting non-competes also have put in place requirements to address what many view as unfair tactics by employers. Many of these laws now require that employees be provided with non-competes before they are given a job offer and that the employer advise the employee to have the agreement reviewed by a lawyer. Some states now require that an employer continue to pay an employee during the time they cannot work because of the non-compete or that an employer provide extra valuable consideration to the employee in exchange for signing the non-compete, like stock options.
Just since 2017, Massachusetts, Maryland, Maine, New Hampshire, Illinois, Washington, and Oregon have enacted new laws restricting the use of non-competes. In many other states, similar laws are pending. We see this as a trend that will continue. In addition, many of these new laws have vague definitions, which will result in further court litigation and/or legislative amendments to define the contours of these new laws. Employers can expect to face these issues when seeking to enforce their non-competes and when defending against non-compete litigation brought by competitors.
In 2018, for example, Massachusetts enacted a law restricting the use of non-competes by employers. That law renders void and unenforceable a non-compete against an employee who is laid off or discharged from employment without “cause.” But “cause” is not defined in the statute. To address this open question, a bill was introduced in the state senate in 2019 requiring that “cause” be specifically defined in the agreement. If passed, the law will allow the parties to define cause as broadly or as narrowly as they wish. In turn, this may lead to additional perceived abuses by more powerful employers, court litigation, and further legislative amendments in the non-compete area.