What is up with the federal government’s new-found interest in non-competes and other legal issues that arise when employees move between competitors?
First the Treasury Department issued a report on the impact of non-compete agreements on the economy. Then Congress passed the Defense of Trade Secrets Act. And then, in May of this year, the White House issued its own report on non-compete agreements.
What do these federal initiatives mean? And how do these changes effect employers and employees?
The White House’s Concerns about Misuse of Non-Competes
Like the report the Treasury Department issued in April, the new White House report, entitled “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” looks at the effect that non-compete agreements have on the economy and on workers. Both reports express concerns about how non-compete agreements are being used, including:
- The use of non-competes with low-wage workers and other workers who do not have trade secrets
- The use of restrictions that are unenforceable under applicable state law
- The failure to clearly explain to workers the significance of the non-compete they are being asked to sign
- The failure to inform workers that they will be required to sign a non-compete until they have already left their previous job
- The failure to give workers real consideration in exchange for signing a non-compete
The White House report makes clear it does not see this as a small issue, citing research indicating that nearly 1/5th of U.S. workers are bound by non-competes, including 1/6th of workers earning less than $40,000 per year. Further, the report suggests that the improper use of non-competes depresses wages and stifles innovation.
The report pays some lip service to the benefits of non-competes, but the Administration plainly views non-competes in mostly negative terms.
Other Federal Initiatives Addressing Employee Competition Issues
Congress is getting in the act, too.
The Defense of Trade Secrets Act (“DTSA”), which recently passed both houses of Congress, establishes a new federal cause of action for trade secret theft, along with new remedies. Observers have called the DTSA the most significant legal development in this area in years.
Last year, Senators Franken and Murphy introduced the Mobility and Opportunity for Vulnerable Employees (“MOVE”) Act that would have banned the enforcement of non-competes against workers making less than $15/hour. While the MOVE Act didn’t become law, its objectives are in line with the Obama Administration’s views on these issues.
What Should Employers Be Doing?
The White House report states that “in coming months” it will convene a group of experts with the ultimate goal of putting “forward a set of best practices and call to action for state reform.”
How much impact a lame-duck administration can have is a fair question. A Clinton Administration most likely would continue this effort. But a Trump Administration almost certainly would see things differently given that the Trump campaign made campaign volunteers sign non-compete agreements.
Importantly, the Administration’s concerns appear to be limited to true non-compete agreements. Less burdensome restrictions – like non-solicitation covenants, garden-leave clauses and non-disclosure provisions – most likely would be deemed acceptable. Count this as another reason why smart employers should always use the least burdensome restrictive covenant.
It would be an overstatement to suggest that these events presage a federal takeover of the law on employee competition issues. State law will continue to be the dominant force in this area. But it is fair to say that federal law almost certainly will play an increasing part in the equation going forward.
James Komie is an attorney with Howard & Howard in Chicago, IL. He regularly writes and speaks on new developments and trends in the law regarding non-competes and trade secrets, as well as issues relating to the financial services industry.