The Federal Trade Commission (FTC) is proposing a set of rules which, if passed and deemed constitutional, would severely limit the use of non-compete clauses between employers and their employees.
The proposed rule would, among other things, provide that it is an unfair method of competition for an employer to enter or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.
I sat down with my partner, Scott Unger, to address this issue.
Non-Compete Clause Basics
A non-compete clause is a contractual term between an employer and a worker that typically blocks the worker from working for a competing employer or starting a competing business within a certain geographical area and period after the worker's employment ends.
Currently, there is no federal legislation governing the use and enforcement of restrictive covenants. Rather, their enforceability depends on the application of state law.
All 50 states currently restrict or curtail their use to some degree. Three states — California, North Dakota and Oklahoma — have adopted statutes rendering non-compete clauses void for nearly all workers.
Among the remaining 47 states where non-compete clauses may be enforced under certain circumstances, eleven states and the District of Columbia have enacted statutes making non-compete clauses void or unenforceable — or have banned employers from entering non-compete clauses — depending on the worker's earnings or other similar factors.
In the states where restrictive covenants are legal, courts employ a reasonableness inquiry when determining whether the provision is enforceable.
Generally, courts first consider whether the restraint on the former employee is greater than needed to protect the employer's legitimate interest.
If the employer can demonstrate a legitimate interest, then the employer must show that the non-compete clause is narrowly tailored to achieve that purpose. In doing so, courts consider whether the geographical and time scope provided for in the restrictive covenant is reasonable.
Some states, like Pennsylvania, require that the employer provide some form of consideration in exchange for the restrictive covenant.
The Broker Protocol
Current law in the states where restrictive covenants are enforceable requires a deeper analysis, weighing the employer's right to protect its investment in their business and employees versus the employee's right and need to support themselves. In other words, restrictive covenants are not enforced haphazardly or without these important considerations.
