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Highlights:
- The most enforceable noncompetes align with the employee's role, state laws, and a clearly defined protectable interest.
- Courts now favor narrow non-solicit and confidentiality agreements over broad noncompetes.
- With inconsistent state laws and federal scrutiny, employers must tailor restrictive covenants by jurisdiction.
Although the Federal Trade Commission (FTC) announced that it was ending its appeals of decisions in the Fifth and Eleventh Circuits which set aside the FTC nationwide noncompete ban, thereby ending its defense of the Biden administration's 2024 rule, the FTC simultaneously communicated that it intends to pursue enforcement action alleging anticompetitive conduct with respect to restrictive covenants that it views as being overly broad or unnecessary, and that it is particularly focused on the healthcare industry.
Indeed, the FTC sent letters to several employers in the
healthcare industry to emphasize the FTC's "commitment to
vigorously protecting Americans from anticompetitive conduct and
unfair methods of competition." The FTC went on to encourage
current and former employees restricted by noncompete agreements,
and employers facing hiring difficulties due to a rival's
noncompete agreements, to share information about the use of
noncompete agreements with the FTC.
With all the negative attention that noncompete agreements have
received on both the state and federal levels, successfully
drafting enforceable noncompete agreements and other restrictive
covenants arising out of the employment context can be a daunting
task.
Below are some general guidelines to be mindful of as you consider
drafting noncompete agreements.
1. Understand Applicable State Law and Do Not Assume Choice of Law Provisions Will Be Enforced
While some state legislatures have banned noncompete and
non-solicit agreements all together, others have restricted the
classes of employees with whom employers may enter noncompete
agreements (often focusing on wage level or nonexempt status under
the Fair Labor Standards Act), required consideration beyond new or
extended at-will employment, required advance notice of the
agreement before the employment relationship begins, and restricted
the length and geographic scope of enforceable agreements.
Furthermore, some courts in jurisdictions more favorable to
noncompete agreements have refused to honor choice of venue and law
provisions inserted by employers into noncompete agreements in an
attempt to avoid more restrictive state laws in the state where the
employee lives and works.
Employers should make every effort to draft noncompete agreements
that will comply with the laws of the state where the employee
lives and works.
2. Narrow the Length and Geographic Scope and Be Mindful of State Law Provisions Regarding Reformation of Overbroad Agreements
State law also varies significantly regarding the discretion of
judges to reform an agreement they deem to be overbroad in either
geographic scope or the length of the restricted period. Some
states grant judges complete discretion (and indeed may even
require judges) to rewrite the agreement to be reasonable in
geographic scope and time period. Other jurisdictions may only
permit the striking of the overbroad language and enforcement of
anything that is left (the traditional "blue pencil"
method), and still other states do not permit any modification of
an overly broad agreement.
Being mindful of the limitations on the discretion the judge may
have with respect to an overbroad agreement will inform how you
draft the agreement. Ultimately, regardless of the jurisdiction,
the very best means by which to increase the likelihood of
enforcement is to draft the noncompete agreement as narrowly as
possible in terms of geographic scope and time. A judge is far more
likely to enforce an agreement that seems reasonable on its
face.
3. Consider Relying Solely on Non-Solicit Agreements for a Reasonable Period of Time
Courts always prefer to be asked to enforce a customer non-solicit agreement rather than a noncompete agreement, particularly non-solicit agreements that have been narrowly tailored to only restrict solicitation of those customers with whom the former employee had contact or about whom the former employee had access to confidential information. Relying solely on a non-solicit agreement rather than a noncompete takes away the issue of whether the geographic scope is reasonable (because there is none), and the court is far more likely to immediately regard the agreement as appropriately narrow and enforceable.
4. Specifically Target Which Employees Must Sign Restrictive Covenants
Even in states where noncompetes are enforceable, they are still
"disfavored" as a matter of public policy because of
their interference with an individual's ability to earn a
living. As a result, courts will not enforce noncompete agreements
unless they are necessary to safeguard an employer's
"protectable interests" – typically customer
goodwill and confidential information shared with the employee in
connection with performance of the employee's job duties.
Employers should limit the use of noncompetes to just those
employees who have access to truly confidential information or are
"the face of the company" to significant customers of the
company. Overbroad use of noncompete agreements inevitably leads to
decisions not to enforce the agreements with certain employees
(because the agreements are likely not enforceable due to a lack of
a protectable interest with that employee), which can make
enforcement more difficult against those former employees against
whom the employer truly needs protection from unfair
competition.
5. Don't Forget About Confidentiality Agreements
Regardless of jurisdiction, courts will almost universally
enforce confidentiality agreements. Employers can significantly
interrupt the unfair competition of prior employees if there is
evidence that an employee has taken confidential information,
including information regarding clients or customers. Even in the
absence of a signed confidentiality agreement, employees have a
general duty of loyalty to their former employer not to disclose
confidential information. But a signed confidentiality agreement
indicating the former employee was put on notice of such
obligations can be a powerful tool.
While not an exhaustive list, being mindful of these considerations
when drafting a noncompete agreement or other restrictive covenant
can help develop agreements more likely to be enforced.
Originally published by HR.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
