Noncompetes, the sky is not falling

I know it seems like every day there’s another story about some state legislature or federal agency banning (or trying to ban) noncompetes or a story about how some courts are reining them in.

But the sky is not falling.

Noncompetes are not dead. (Nor are confidentiality agreements or other restrictive covenants.)

Let’s pause for a quick recap . . .

Here’s what’s actually happened just this year (so far):

  • January 4: The Federal Trade Commission (FTC) announced consent orders in three unprecedented enforcement actions, bringing claims against companies for using noncompetes in a context that the FTC believes were inappropriate.
  • January 5: The FTC issued a notice of proposed rulemaking, indicating that the FTC intended to ban virtually all noncompetes and de facto noncompetes nationally. (No one quite knows how broadly the ad hoc de facto test will sweep.)
  • January 7: President Biden said that in his State of the Union that his Administration is banning noncompetes. (He specifically mentioned fast-food workers, suggesting that he is focused on low-wage workers.)
  • On February 1, 2023, U.S. Senators Young and Murphy (along with the support of two other co-sponsors) again proposed a ban on all employee noncompetes and U.S. Representative Scott Peters (along with the support of two other co-sponsors) filed a House version of the same re-proposed ban.
  • On February 9, 2023, U.S. Senators Marco Rubio and Maggie Hansen reintroduced the Freedom to Compete Act. Like the prior versions, the bill would ban noncompetes for anyone not exempt under the Fair Labor Standards Actthe approach taken first by Massachusetts and later by Rhode Island.
  • On March 6, 2023, U.S. Senators Klobuchar, Collins, Rosen, Tillis, King, Thune, Merkley, Capito, Coons, Paul, Durbin, Moran, Shaheen, Wicker, Smith, Marshall, Blumenthal, Cramer, and Boozman introduced the Conrad State 30 and Physician Access Reauthorization Act, which primarily addresses immigration issues for physicians in underserved communities, but would also ban the use of noncompetes for those covered by the Act.
  • March 15: The FTC announced another enforcement action.
  • March 22: Kentucky passed a law amending a law passed in 2022 by removing a ban of noncompetes for (permanent) direct care staff and making clear that the ban applies only to temporary staff.
  • May 3: Maryland passed a law (effective October 1, 2023) updating its low-wage threshold.
  • May 4: Indiana passed two laws related to physician noncompetes: (1) a law (effective July 1, 2023) banning noncompetes for primary care physicians and adding new limitations to noncompetes for other physicians and (2) a law (effective May 4, 2023) establishing a task force to, among other things, “[s]tudy and make recommendations concerning the market concentration of health care providers and contributing factors, including: (A) whether: (i) noncompete clauses in practitioner contracts contributes to a restraint of trade; and (ii) prohibiting noncompete clauses would create greater competition in the health workforce . . . .”
  • May 24: Minnesota passed a law (effective July 1, 2023) banning virtually all noncompetes.
  • May 24: Tennessee passed a law (effective May 11, 2023) prohibiting temporary healthcare staffing agencies from using noncompetes with direct care staff.
  • May 25: Maine passed a law (with retroactive effect) banning noncompetes for veterinarians – unless they have an ownership interest in the facility they work in.
  • May 30: The General Counsel of the National Labor Relations Board (NLRB) issued a memo outlining why she believes that noncompetes (and other restrictions) violate the NLRA.
  • June 1: Iowa passed a law narrowing the scope of a law passed in 2022 by removing a restriction on the use of noncompetes for direct care service providers and in connection with certain healthcare provider placements.
  • June 28: Connecticut passed a law (effective October 1, 2023) rendering physician noncompetes unenforceable if (in addition to existing limitations) any extension or renewal of the contract containing the noncompete does not include a “material change to the compensation terms . . . prior to or at the time of the extension or renewal” or if “the contract or agreement expires and is not renewed by the employer or the employment or contractual relationship is terminated by the employer, unless such employment or contractual relationship is terminated by the employer for cause.” (These restrictions do not apply if the physician works for a practice group “of not more than thirty-five physicians the majority ownership of which is comprised of physicians.”) The law also imposed limitations on noncompetes for advanced practice registered nurses and physician assistants similar to those applicable to physicians.
  • September 1: California passed a law (effective January 1, 2024) that permits employees to flee to California to void their noncompetes (and nonsolicitation agreements). A separate bill awaiting Governor Newsom’s signature will, among other things, require companies to notify their current employees and anyone they employed on or after January 1, 2022 that their noncompetes (and nonsolicitation agreements) are void. (More on that if the bill is signed.)

For changes to the laws over the past 10-plus years, see The Changing Landscape of Trade Secrets Laws and Noncompete Laws Around the Country. For other bills pending this year, see 84 noncompete bills in 33 states, 7 passed, 2 about to, and (still) 5 federal bills. (Three additional noncompete bills were filed after that posting, bringing the number to 87.)

So what does it mean?  

There is definitely a tide of vocal hostility among some groups toward noncompetes. The hostility is picked up in the press, which then informs policy decisions.

But what’s been published about tends to highlight the abuses, rather than legitimate uses.

Accordingly, despite 14 state bills to ban noncompetes, no state other than Minnesota has actually passed a ban. Even New York, which has come close (and, though unlikely, still could do something like that), has not banned noncompetes.

On the federal side:

  • there has been no action in Congress on any of the bills (the first of which were filed in 2015);
  • the FTC’s proposed rule to ban noncompetes has not yet been finalized; and
  • the NLRB’s GC’s memo is just a memo, not (yet, at least) an official position of the NLRB itself.

Further, as indicated above, most of what passed this year was focused on healthcare workers.

There is unquestionably an increasing hostility toward noncompetes, confidentiality obligations, and other covenants. That is already reflected not just in bills, but in some judicial opinions (see, for example, Delaware noncompete law trending).

So what should companies do?  

Companies need to be thinking hard about what steps they need to take to protect their confidential information (including trade secrets) and other legitimate business interests.

There are many options we’ve identified before and will be discussing again soon, along with additional ideas, including for example, ERISA “Top Hat Plans” with forfeiture-for-competition provisions.

So what should employees do?  

I will continue to bang on the drum for employees:

In the meantime 

We’ve created the following resources (available for free):

 

*A huge thank you to Erika Hahn for all of her extraordinary help in tracking and monitoring all of the bills around the country.

*Photo credit: Cico Zeljko