August 2021 Volume 3

OPERATIONS & MANAGEMENT

Non-Competes: Is Federal Oversight Coming or Will State Variation Continue? By Johanna Fabrizio Parker

On July 9, 2021, President Biden signed an executive order, providing (in part): To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility. Reference: ht t p s : / /www.whi t ehou s e .gov /br i e f ing - r oom/pr e s i d ent i a l - actions/2021/07/09/executive-order-on-promoting-competition-in- the-american-economy/ So, what does this mean for you, if your employees have non- competes? At this point, practically, nothing. But it does signal a potential shift in thinking where the federal government becomes more actively involved in limiting the enforcement of non-compete agreements. Currently, these kinds of agreements are governed by state law, so enforcement can vary widely. When I talk about non-competes, I specifically am referring to those agreements between an employer and employee that prevent that employee from working in a competing business both during and after his/her period of employment (for some specified period of time). These provisions often are part of larger restrictive covenant agreements, which can include confidentiality (non-disclosure) as to company information and trade secrets, as well as non-solicitation of company employees and/or clients and customers. Generally speaking, these “other” restrictive covenants are easier to enforce. Courts (and state legislatures) understand a company’s legitimate need to protect its information and relationships -- especially those relationships to which an individual is introduced only because of his/her employment. Yet, even in this context, I am seeing limitations on the ability to protect. For example, non-disclosure agreements generally could continue for as long as the information

was confidential. Now some states are looking for specific time limits on an employee’s obligations with respect to confidentiality. Non-competes are viewed with the most scrutiny, and employers should share this viewpoint in order to maximize enforceability. That is, if you want an enforceable non-compete for your employees, you need to take certain steps from the outset. First, what state law should apply? You can’t just pick -- even if you pick where your company headquarters is located. You have to consider the state(s) where that employee works for you, and what that state law says. Will that state even enforce what we lawyers call a “choice of law” provision in a contract, i.e., language that says that this contract is governed by [insert state] law. Some will, some won’t, and some say maybe -- we will apply another state’s law if it doesn’t materially differ with ours. From my perspective, the last category is always the most challenging; you have to decide what you can do under the state you want to specify, then under the state where the employee works, and then decide if there is a difference to support and allow your choice of law. What a mess, right?

FIA MAGAZINE | AUGUST 2021 46