Noncompetes 2023: The sky still has not fallen… yet

The reports of my death are greatly exaggerated.”
– Noncompetes (actually, Mark Twain)

As previously noted, reading the news reports, one might come away thinking that noncompetes have been banned across the country.

That is not true.

In this post, I provide everything you need to know about key developments in the states, Congress, federal agencies, and the courts, as follows:

  • A recap of what happened this year, starting with a quick summary of the developments through September discussed in my prior post and then moving to a more detailed summary of the important developments since September;
  • Information about significant non-events;
  • A few interesting (to me anyway) statistics;
  • What to expect in 2024; and
  • Steps to take in light of the current and expected developments.

Recap of Events through September:

The key noncompete events of the first nine months of 2023 were:

  • On the federal side:
    • Congress filed six bills to limit the use of noncompetes or to ban them altogether. (Two of the bills are House analogues for bills filed in the Senate.)
    • The Federal Trade Commission (FTC) issued a proposed rule to ban virtually all noncompetes and so-called “de facto” noncompetes nationally. (No one quite knows how broadly the ad hoc de facto test will sweep.) The FTC also brought a handful of claims against companies for using noncompetes under circumstances that the FTC believes were inappropriate.
    • President Biden reiterated in his State of the Union that he was banning noncompetes, though he specifically mentioned fast-food workers, suggesting that he is focused specifically on low-wage workers.
    • The National Labor Relations Board (NLRB) General Counsel issued a memo outlining why she believes that noncompetes (and other restrictions) violate the NLRA. She also charged an aesthetics company with using noncompetes, no-recruits, no-hire covenants, and training repayment agreements, as well as imposing other obligations, that, in the General Counsel’s view, constitute an unfair labor practice in violation of the NLRA.
  • Between March and September, ten states modified their noncompete laws (11 changes in total):
    • California purported to void all restrictive covenants for anyone who flees to California.
    • Connecticut, Kentucky (scaling back last year’s change), Indiana (two laws, one of which was the establishment of a task force), Iowa, South Dakota1 (scaling back a 2021 change), and Tennessee, enacted noncompete laws related to the healthcare industry.
    • Maine banned noncompetes for veterinarians.
    • Maryland updated its low-wage threshold.
    • Minnesota enacted a full ban.

So, that was a total of six bills in Congress, two different federal agencies taking action, and 11 new laws in ten states through September.

In addition, four Delaware cases (from two judges of the Chancery Court: Will and Zurn) issued decisions (supplementing one from last year) suggesting that they would take a dim view of noncompetes.

For the details of the developments identified above, see Noncompetes, the sky is not falling

Additional developments (though not related to noncompetes specifically) were:

More-Recent Developments:

The following addition developments have happened since September:

  • On October 13, California enacted a law to (1) mandate that its noncompete ban (Cal. Bus. & Prof. Code § 16600) is to be read broadly; (2) require companies to notify employees subject to a covenant that violates 16600 that their restrictions are void and unenforceable; and (3) add penalties for noncompliance.
  • On November 1, the Delaware Supreme Court heard oral argument in Ainslie v. Cantor Fitzgerald, L.P., one of the series of cases signaling a decreased willingness of the Delaware Chancery Court to enforce noncompetes. The appeal concerns the enforceability of a noncompete and forfeiture-for-competition provision in a limited partnership agreement.
  • On November 17, the Washington, D.C. Attorney General issued a press release announcing, “Three District Employers Must Pay More Than $150K for Violating DC’s Ban on Non-compete Agreements.” The cases involved three companies: (1) Accountable Healthcare Staffing, Inc., a healthcare staffing firm; (2) SPiN DC, LLC, a ping pong social club (yep, you read that right), and (3) Hissho International, LLC, a food service company providing a franchising system for sushi bars. All three are paying fines and agreeing to restrictions concerning their use and/or enforcement of noncompetes and/or no-poach agreements.
  • On November 23, the Delaware Chancery Court (this time, Vice Chancellor Laster) issued another decision (Sunder Energy, LLC v. Jackson) continuing to make the Chancery Court an increasingly inhospitable forum for enforcing noncompetes. In this case, Vice Chancellor Laster made clear that he will not look favorably on choice of law clauses requiring application of Delaware law to noncompetes and will reform noncompetes sparingly. (In fairness, the agreements at issue were not just overreaching, they were egregiously so – and in multiple different ways.)

The Development That Wasnt:

While there were lots of bills under consideration (see below), probably the most significant near-development was a full-on noncompete ban in New York. It did not happen. Thankfully, Governor Hochul saw through the rhetoric and stuck to her guns, keeping her focus on protecting workers who need it, not those who don’t.

Statistics: 

In the end, there were a total of 98 noncompete bills under consideration in 35 states in 2023. (In 2022, there were 98 noncompete bills in 29 states.) This year’s bills break down as follows:

  • 15 of the bills (in 10 states) proposed a complete ban of employee noncompetes, only one of which passed:
    • Arkansas,
    • Connecticut,
    • Maine,
    • Massachusetts,
    • Michigan,
    • Minnesota (four bills; one enacted),
    • New York (two bills),
    • Rhode Island (two bills),
    • West Virginia, and
    • Wisconsin.
  • 10 of the bills (in 10 states) proposed wage-related limitations on the use of noncompete, only one of which passed:
    • Connecticut,
    • Iowa,
    • Maryland (enacted to increase an existing threshold),
    • Michigan,
    • Missouri,
    • New Jersey,
    • New York,
    • Pennsylvania,
    • Texas, and
    • Vermont.
  • 32 of the bills (in 21 states) proposed changes to noncompetes in the healthcare industry, seven of which passed:
    • Arkansas,
    • Connecticut (two bills; one enacted),
    • Florida,
    • Georgia,
    • Indiana (three bills; two enacted, one of which was the establishment of a study task force),
    • Iowa (four bills; one enacted),
    • Kentucky (enacted to scale back last year’s amendment),
    • Louisiana,
    • Massachusetts,
    • Montana,
    • Nebraska,
    • Nevada,
    • New Jersey,
    • Ohio,
    • Oregon,
    • Pennsylvania,
    • Rhode Island (three bills),
    • South Dakota (enacted to scale back a 2021 change),
    • Tennessee (enacted),
    • Texas (four bills), and
    • Utah.
  • 2 of the bills (in 2 states) were for veterinarians, one of which passed: Maine (enacted) and Massachusetts.
  • 2 bills in California to expand and export its law to other states, both of which passed.
  • Other proposed changes: 6 bills required some type of notice of the noncompete; 13 bills included fines or penalties for violations; and 3 bills were to adopt UREAA. With the exception of California’s new law containing penalties, none of these passed.

The upshot is that there were 12 noncompete laws enacted this year in 10 states.

Looking forward: 

  • Wage thresholds for using noncompetes in several states will be increasing in 2024. Earlier this month, we updated all thresholds that could be updated at the time; we will be updating the others as soon as the new numbers are released.
  • The FTC is expected to issue a Rule in April. My prediction is that they will move forward with a full ban, consistent with their November 28 letter to New York Govern Hochul (though I suspect it will include a broader-than-previously-proposed exception for noncompetes used in connection with a sale of a business). I also believe (along with many others) that no sooner will the FTC issue its rule than it will be challenged in court and invalidated. Partially because of that, the FTC will no doubt also continue to bring enforcement actions, including against high-profile companies so it can send a message to all companies that no one is safe; if companies don’t make changes voluntarily, they will be forced to.
  • The NLRB will continue to bring unfair labor charges based on the use of noncompetes and other agreements, policies, and procedures.
  • California’s new laws will create a mess. We will likely see some key executives – the very people that most agree are proper parties to a noncompete and others flee to California to avoid their agreements. Many of those moves will be shams to cleanse the employees of their noncompetes and other contractual obligations. We will also see lawsuits (brought by individuals, brought as class actions, and brought by the attorney general) asserting claims for purported violations of the law. I fully expect that someone will appeal the extraterritorial, retroactive impact of the law at the right time.
  • New York is likely not done with its machinations over a noncompete law. I expect we will see a wage-threshold ($200,000 salary or $250,000 total compensation) imposed in 2024.
  • More state attorneys general (including in California) will bring claims (like we saw in D.C.) for alleged violations of the new laws.
  • More states, federal agencies, and some members of Congress will expand the scope of their ire, and target no-recruit agreements, nonsolicitation agreements, anti-moonlighting provisions, and training repayment agreements (sometimes called “TRAPs”).
  • More cease and desist letters to former employees and lawsuits against former employees will be based on claims that the employee stole trade secrets and violated their fiduciary duties, rather than grounded on a breach of a noncompete.

Steps to take:

I know I have been banging the drum of being prepared for a while at this point. But an ounce of prevention is absolutely worth a pound of cure.

I cannot emphasize enough the importance of:

* * *

Seeing as I started with Mark Twain, I will end with him (though I don’t believe he actually said it). To those who think that the solution to the over-hyped problems caused by noncompetes is to ban them, I say the following:

For every problem there is always a solution
that is simple, obvious, and wrong.

* * *

Happy New Year! 

* * *

We know how hard it is to keep up with the ever-changing requirements around the country. To help, we created the following resources (available for free):

We hope you find all of these resources useful. More are on their way.

And please know that we are grateful for all of the input we’ve received over the years, and welcome any suggestions for improvements that you may be willing to share.

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[1] South Dakota’s new law, omitted from the prior post, scaled back a 2021 law banning noncompetes for certain (many) healthcare providers to instead make such noncompetes voidable.

 

*Thank you to Erika Hahn for her extraordinary work helping me stay on top of all of the pending noncompete legislation around the country.