Ask 59 Trade Secret Lawyers and Paralegals About Noncompetes and Get One Opinion

Ask two lawyers for their opinion and you’ll get three opinions.

But I asked almost 60 lawyers (and paralegals) and got only one opinion — consistent with the last time, when I asked 21 lawyers and a paralegal and got the same opinion.

The opinion is set out in a July 14 letter we collectively submitted to the White House and the FTC in response to President Biden’s July 9, “Executive Order on Promoting Competition in the American Economy.”

Our submission is based on the collective experience of 57 lawyers and two paralegals from around the country, from California to Massachusetts to Florida, including Georgia, Illinois, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Texas, and others — each of whom practices extensively in the area of trade secrets and restrictive covenants.

Given the broad range of clients we help, our respective locations around the country, and the local, regional, or national scope of our respective practices, we see the issues from all three perspectives: that of the employee, the former employer, and the new employer. And, we see the issues from diverse geographic perspectives and legal frameworks. Yet, we were all in agreement about what to say in a 36-page letter/79-page submission to the White House and the FTC.

The thrust of our position was three-fold.

First, we provided background, starting with a summary of noncompete law generally, how it relates to trade secret law, and how trade secret law and other tools (like nondisclosure agreements) are insufficient to protect trade secrets (and other recognized, protectable business interests). We then explained that the issues surrounding the use, enforcement, and impact of noncompetes are complicated and exacerbated by many, strongly held misconceptions. We also explained that the research upon which any decision might be based at this point is nascent, inconclusive, and inconsistent. Indeed, as we pointed out, three of the leading researchers in the area, Evan Starr, J.J. Prescott, and Norm Bishara, published a research paper demonstrating that – when employees are given advance notice that a noncompete will be required – noncompetes can actually have significant positive effects, directly contrary to the results of some other research about the purported ill effects of noncompetes:

Second, separate from the limitations of the current research, we recommended that the White House and FTC consider leaving these matters to the states — which, as laboratories of democracy, have been regulating noncompetes for over 200 years and have recently been reevaluating their regulations. Indeed, as noted in the letter, “Over just the past several years, no fewer than 37 states across the country have been engaged in the process of reevaluating their noncompete laws. . . . In total, . . . over the past several years, 24 states (plus Washington, D.C.) have enacted legislation modifying their noncompete laws, four (including D.C.) in just this year alone.”

Third, we also recommended that — if the FTC were to promulgate a rule or otherwise attempt to regulate noncompetes — it should be judicious and focus just on the abuses. Accordingly, we recommended as follows:

A.   Fairness and Transparency

There are several changes that would help to balance the playing field and ensure fairness.

• • • A ban on noncompetes for low-wage workers (defined as employees who are not exempt under the Fair Labor Standards Act). There is rarely a need for such workers to be bound by noncompetes, and even when the need might exist in the abstract, the potential detriment to the worker will typically outweigh it.
    • A requirement that employers provide advance notice that a noncompete will be required. As Professor [Matt] Marx has observed, “[i]f it were the case that workers made fully informed decisions about signing a non-compete and could negotiate higher compensation in exchange for doing so, these agreements could be valuable for both workers and firms.”⁸⁹ For example, it would be best practice to include a noncompete with any formal offer of employment.

B.   Limitations on Use to Only What Is Necessary

Recognizing that noncompetes are an important tool in the protection of trade secrets (and other business interests recognized by many states), the following changes would allow the agreements to be used only where needed and only in a non-overreaching way.

• • • Mandate the so-called “purple pencil” rule to address overly broad noncompetes. States take one of three general approaches to overly broad noncompetes: reformation (sometimes called “judicial modification,” in which the court essentially rewrites the language to conform the agreement to a permissible scope); blue pencil (in which the court simply crosses out the offending language, leaving the remaining language enforceable or not); and red pencil (also referred to as the “all or nothing” approach, which, as its name implies, requires a court to void any restriction that is overly broad, leaving nothing to enforce). Although in its new law, Massachusetts retained the reformation approach (which it and the majority of states have historically used), an equitable, middle-ground approach (which one Massachusetts state senator dubbed the “purple pencil”) is a hybrid of the reformation and red pencil approaches, requiring courts to strike the noncompete in its entirety unless the language reflects a clear good-faith intent to draft a reasonable restriction, in which case the court may reform it.
    • Provide for “springing” (or “time-out”) noncompetes. To encourage employers to limit their reliance on noncompetes, they must have a clear and viable remedy when an employee violates other (less-restrictive) obligations (such as a nondisclosure and nonsolicitation obligations), misappropriates the employer’s trade secrets, or breaches their fiduciary duties to the employer. In Massachusetts and Rhode Island (copying Massachusetts), the new noncompete laws expressly allow courts to prohibit the employee from engaging in certain work when, based on the employee’s breach of certain enforceable obligations, the court is convinced that the individual cannot be trusted to perform the work without continuing to violate their other obligations. We colloquially refer to these as “springing noncompetes” (or sometimes “time out” noncompetes) because they are not required of the employee in the first instance, but are only activated if the employee engages in certain unlawful behavior.

The letter has been received and, we hope, will provide assistance to the White House and FTC as they consider this important and fraught issue.

This is just the first step in what we expect to be a lengthy process, not just at the White House and FTC, but in Congress as well.

Stay tuned, we’ll keep you posted.

_______

⁸⁹     The Chilling Effect of Non-Compete Agreements, by Matt Marx and Ryan Nunn (May 20, 2018) (emphasis added), available at https://econofact.org/the-chilling-effect-of-non-compete-agreements. Professor Marx continued with his observation, “However, the actual conditions under which non-competes are used provides reason to doubt that non-competes are indeed mutually beneficial in all or most cases.” Id. This observation is consistent with the findings in Noncompete Agreements in the U.S. Labor Force, by Evan Starr, J.J. Prescott, and Norman Bishara (Oct. 12, 2020) (identifying various positive effects of noncompetes when advance notice is provided, including higher earnings, more access to information, more training, and more job satisfaction), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2625714. Instructively, according to that study, more than half (52 percent) of people presented with a noncompete chose to “forgo[] the opportunity to negotiate [because] the terms were reasonable,” while 41 percent assumed they were not negotiable, id. at p. 9, the latter of which could be addressed with advance notice. Indeed, 55 percent of people presented with a noncompete before they accepted the offer thought it was reasonable and 48 percent thought they could negotiate it. Id. Accordingly, the recommendations in this letter are intended to address these issues holistically.

*Thank you to Erika Hahn for the tremendous behind-the-scenes work on this letter. Photo credit: Antonios Ntoumas.