Client Alert — Obama Administration Issues Call to Action on Non-Competes
November 11, 2016
The Obama Administration has issued a State Call to Action on Non-Compete Agreements. The Call to Action urges state policymakers to pass "Best Practice" policy objectives which include: (1) banning non-compete clauses for certain categories of workers such as health and safety and those employees who are laid off or terminated without cause; (2) requiring additional consideration to support a non-compete agreement; and (3) adopting a "red pencil" doctrine to void the entire contract if one provision is overbroad. However the Administration's "Best Practices" are contrary to the current laws in many states, as well as state and federal court precedent.
While the Obama Administration is promoting its "Best Practices" for state lawmakers to limit non-compete enforcement, we suggest the following best practices for employers.
• Review non-compete agreements to ensure compliance with current state laws. All employers should understand the state laws where they operate related to consideration; requirements for limiting the scope, time, and territory of a non-compete; and the state's policy on the "blue pencil" doctrine. All non-compete agreements should have severability language allowing a court to reform or strike an overbroad restriction and enforce the remainder of the agreement.
• Ensure you are taking full advantage of the protections offered in many states. Laws regarding the enforceability of non-compete agreements are different in each state. Employers must understand the importance of choice of law provisions and choice of forum provisions that should be in all non-compete agreements. Many employers designate a state law that is not as favorable as other states that may be applicable to the employment relationship.
• Ensure that non-disclosure of confidential information provisions are specifically drafted to protect the employer's most valuable information that is actually worthy of protection as well as the appropriate duration of the non-compete to protect against disclosure of the information. Ensure that the agreement appropriately protects intellectual property, such as inventions, patents, copyrights and trademarks.
• Confirm that applicants have disclosed any non-compete restrictions with their prior employers. Comprehensively assess any non-compete restrictions prior to making an offer of employment or make the offer conditional on the employment not violating any non-compete agreement.
In the right circumstances, non-compete agreements play a pivotal role in protecting businesses and promoting innovation. It remains to be seen whether state legislatures will answer the White House's call for action on non-compete reform.