Trouble With Non-Compete Agreements
At their inception, non-compete agreements were intended to prevent former executives and senior management from transferring a business’s sensitive information—e.g., trade secrets, intellectual property, and certain proprietary information—to competitors. Today their use is much more widespread. Almost 20% of American workers are subject to non-compete agreements and 12% of those workers are in low-skill, low-wage jobs that do not involve trade secrets. What’s more, the use of these non-competes is growing, even being used with students and entry-level workers in internships.
As the use of non-competes in these situations grows, so does their scrutiny by both state and federal lawmakers. California and Montana already prohibit non-competes and many states are starting to follow suit. For example, in 2016, Illinois prohibited non-compete agreements for employees who earn less than $13 per hour; in 2018, Massachusetts passed legislation regulating non-competes and limiting their enforceability; in 2019, Washington banned non-competes for workers making less than $100,000 per year, Maryland banned non-competes for employees making less than $15 per hour or $31,200 per year, and Maine banned non-competes for employees making less than 400% of the federal poverty line ($49,960 in 2019).
Non-competes are a growing concern at the national level as well. Several senators recently sent a letter to the Federal Trade Commission (the "FTC") expressing bipartisan concerns that workers suffer “serious anti-competitive harms” as a result of non-compete agreements, and some Senators have even proposed legislation restricting them (including Sen. Chris Murphy and Sen. Marco Rubio). Moreover, in March 2019, sixty signatories, including the AFL-CIO and Open Markets Institute, petitioned the FTC to initiate a rulemaking to prohibit employers from presenting a non-compete clause to their employees and/or independent contractors. Even more recently, in July 2019, Attorneys General from eighteen states urged the FTC to use its antitrust enforcement authority to address anticompetitive labor practices, including non-compete clauses often found in both employment contracts or independent contractor agreements.
In New York, the sentiment against broad non-compete agreements is nothing new. Former New York Attorney General, Barbara D. Underwood, viewed non-competes skeptically in her crusade against them. “Workers should be able to take a new job without living in fear of a lawsuit from their former employer,” said Underwood. “Yet too often, non-compete agreements are misused, especially when it comes to low-wage workers – limiting employees’ mobility and opportunity and preventing businesses from hiring the best person for the job.”
Underwood’s office inspected the misuse of non-competes on rank-and-file employees and reached agreements with several employers to stop using non-competes, including: Jimmy John’s, which eliminated non-competes for sandwich makers; Law360, which eliminated non‑competes for editorial employees; and ESMI, a medical information services company, which eliminated non-competes for phlebotomists. Underwood’s office also published a non-compete FAQ for employees, and proposed legislation that prohibits non-competes for workers earning below $75,000 per year. (Similar legislation to amend the New York City administrative code is under consideration.) Leticia James, Underwood’s successor, has followed suit by joining the states Attorneys General in their petition to the FTC.
So, what does this mean if your startup or small business uses non-competes? Non-compete agreements are becoming harder to enforce against low-wage employees, at least without being substantially curtailed. Unless and until state or federal regulations are passed banning the use of non-competes, any non-competes should be narrowly tailored to your company’s needs.
For instance, New York courts generally disfavor restrictive covenants and will only enforce non-competes that are necessary to protect an employer’s legitimate interests, do not impose an undue hardship on the employee, do not harm the public, and are reasonable in duration and geographic scope. See BDO Seidman v Hirshberg, 93 NY2d 382, 388–89 (1999) (a non-compete agreement is considered reasonable only if it: (1) “is no greater than required for the protection of the legitimate interest of the employer, (2) does not impose an undue hardship on the employee, and (3) is not injurious to the public”); see also Barbara D. Underwood, N.Y. State Att’y Gen.’s Office, Non-Compete Agreements in New York State (2018). An employer’s legitimate interests include preventing disclosure of trade secrets, client lists, and confidential information and loss of highly skilled and specialized employees. See Johnson Controls v. A.P.T. Critical Sys, 323 F. Supp. 2d 525, 534–35 (2004). For duration, courts have found agreements lasting six months or less to be reasonable. See, e.g., Lumex v. Highsmith, 919 F. Supp. 624 (E.D.N.Y. 1996); Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 70 (2d Cir. 1999); Natsource v. Paribello, 151 F. Supp. 2d 465, 470–71 (S.D.N.Y. 2001); Maltby v. Harlow Meyer Savage, 633 N.Y.S.2d 926, 930 (Sup. Ct. 1995). For geographic scope, courts have found worldwide restrictions for employees providing local services (e.g., fitness instructors) to be overly broad, Pure Power Boot Camp v. Warrior Fitness Boot Camp, 813 F. Supp. 2d 489, 507 (S.D.N.Y. 2011), but have contemplated situations in which such a restriction may be appropriate, like telecommuting jobs, GFI Brokers v. Santana, Nos. 06 Civ. 3988, 06 Civ. 4611, 2008 U.S. Dist. LEXIS 59219, at *24 (S.D.N.Y. Aug. 6, 2008).
In the end, it’s a good idea to consult your attorney before using a non-compete. Failing to do so may result in an ineffective non-compete agreement that leaves your business secrets exposed.
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This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.