Non-compete agreements are in the cross-hairs of both federal and state officials, who are looking to ban non-competes in many instances. Senate Bill 2614, introduced on October 16, 2019, if enacted, would outlaw most non-compete agreements as a matter of federal law. There would be a few limited exceptions. In addition, the Attorneys General of nearly twenty states and the District of Columbia have urged the Federal Trade Commission to use its rulemaking authority to end the use of non-compete clauses in employment contracts.

Exceptions to Proposed Statute’s Non-Compete Ban

As a first exception in Senate Bill 2614, any person who sells the goodwill of a business, any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells an asset or interest could enter into an agreement with the buyer to refrain from carrying on a like business within a specified geographic area if the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carried on a like business in such specified geographic area.

As a second exception, any buyer or seller of a business could enter into a one-year agreement with a senior executive official who has a severance agreement for the senior executive official to refrain from carrying on a like business within a specified geographic area if the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carried on a like business in such specified geographic area.

The severance agreement would have to be part of the terms and conditions of the sale; and would require monetary compensation for the senior executive official in the event of termination of the employment of an amount greater or equal to the compensation the official would be reasonably expected to receive from the buyer during the 1-year period following the sale.

Proposed Statute’s Partnership Dissolution Exception

Similar to the rule for the sale of a business, a partner, in the event of an expected dissolution of the partnership or dissociation of a partner from the partnership, could enter into an agreement with any other member of the partnership that the partner would not carry on a like business within a specified geographic area if any other member of the partnership, or any person deriving title to the business or the goodwill of the business from any other member of the partnership, carried on a like business in such specified geographic area.

Nothing in the bill would preclude a person from entering into an agreement with an individual working for the person to not share any information (including after the individual is no longer working for the person) regarding 1) the person, or 2) the work performed by the individual for the person, that is a trade secret.

If enacted, the bill would require a business to post notice of the provisions of the bill in the workplace.

Consequences of Violation  of Proposed Statute

Some violations would be an unfair or deceptive act or practice enforced by the Federal Trade Commission.

Additionally, the United States Secretary of Labor would receive and investigate a complaint of certain violations and could bring an action in court to obtain legal or equitable relief on behalf of an individual aggrieved by the violation together with a civil fine of up to $5,000 for each week the person or business is in violation. The fine would be paid to the individual aggrieved by such violation.

There would also be a private right of action in federal court under which an individual could seek damages, costs and attorney’s fees.

Attorneys General’s Letter to the Federal Trade Commission

On the heels of the Senate bill–perhaps sensing that legislative action is unlikely at the federal level–the Attorneys General of nearly twenty states are urging regulatory action against non-competes.

In a November letter to the Chairman of the Federal Trade Commission, Attorneys General of Minnesota, California, Delaware, District of Columbia, Illinois, Iowa, Maine, Massachusetts, Maryland, Michigan, New Mexico, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, Washington and Wisconsin urged the FTC to use its rulemaking authority to end the allegedly abusive use of non-compete clauses in employment contracts.

AGs’ Alternatives to Non-Competes

According to the Attorneys General, the arguments in support of non-compete clauses are “unpersuasive”. They recount that employers argue that non-compete clauses allow employers to recoup their investment in job training, methods of business, and other intangibles. The Attorneys General submit that, instead of non-competes, employers can use negotiated non-disclosure agreements (NDAs) or trade secret and intellectual property law to protect their investment. The Attorneys General believe employers can also provide term employment contracts with workers—offering workers job security in exchange for workers committing to a job for a fixed period. Employers can also offer regular raises and promotions to retain workers.

The Attorneys General maintain that non-compete clauses also burden businesses seeking to hire workers or enter a market. Restricting worker movement supposedly benefits only the employer seeking to prevent employees from leaving without that employer offering incentives to stay besides potential legal action to enforce a non-compete. In this way, according to the letter, non-compete clauses inhibit innovation and may actually drive consumer costs up by suppressing competition from rival businesses.

The FTC’s Authority to Protect Fair Competition

The letter maintains that the FTC has the clear authority to identify and prohibit “unfair methods of competition” through the rulemaking process. The Attorneys General argue that since the FTC has the “authority and duty” to protect workers as well as consumers, it should act “to prevent another employer from robbing even one more worker of the right to leave for better opportunities”.

What’s Next

Whether the bill or the push for regulatory action by the FTC will gain any traction is uncertain, but businesses with non-compete agreements will want to monitor this bill and consider contacting their political representatives.

by Michael R. Lied