Is noncompete legislation a bridge too far?
New bipartisan legislation aimed at curtailing abuses of noncompete agreements in the workplace is a reality and, while some employment attorneys say change could be a good thing, others are concerned the proposed Senate bill veers into unrealistic, and unfair, territory.
In short, the Workforce Mobility Act, co-sponsored by Senators Todd Young (R-Ind.) and Chris Murphy (D-Conn.), would:
- narrow the use of noncompete agreements to include only necessary instances of a dissolution of a partnership or the sale of a business;
- place the enforcement responsibility on the Federal Trade Commission and the Department of Labor, as well as a private right of action;
- require employers to make their employees aware of the limitation on noncompetes, as studies have found that noncompetes are often used even when they are illegal or unenforceable. The Department of Labor would also be given the authority to make the public aware of the limitation; and
- require the Federal Trade Commission and the Department of Labor to submit a report to Congress on any enforcement actions taken.
According to a press statement from the senators, 40% of American workers have been constrained by a noncompete agreement at some point in their careers. Also, the statement says noncompetes often lack transparency, result in lower wages and that research indicates that workers trapped by noncompetes are less mobile, which results in firms having difficulty hiring workers with the right set of skills.
Noncompete agreements stifle wage growth, career advancement, innovation and business creation, Young contended. “Our bill aims to remove these barriers and create opportunities that help, not hinder, Hoosier workers,” he added. “A complete reform of noncompetes will empower our workers and entrepreneurs so they can freely apply their talents where their skills are in greatest demand.”
Murphy explained that noncompete agreements can also be economic and innovation killers, noting that too many employers hide these agreements in low-wage workers’ contracts, trapping them in low-paying jobs and preventing real competition.
“In Connecticut, it doesn’t matter if you’re working at a fast-food restaurant or a tech start-up; people want the freedom to change jobs and earn higher wages. This bill helps them do both,” Murphy said.
Not so fast, say attorneys who represent employers.
Tom Muccifori, a partner at Archer & Greiner and chair of the Haddonfield, N.J., firm’s Trade Secret Protection and Non-Compete Practice Group, believes the proposed law goes too far and is destined to fail. He adds that it represents the third federal effort to restrict or ban noncompete agreements in the past 18 months (the first two stalled).
“All three of these proposed bills are not likely to become law as currently written,” he says. “They represent a political over-reaction to some of the perceived abuses seen across the country, in which employers have sought to implement noncompete agreements against low-level workers in the fast-food industry, sandwich shops, pizza parlors and the like.”
Muccifori says that those recent cases have prompted legislatures in many states—notably Massachusetts, New Jersey, Pennsylvania, New Hampshire and Vermont—to each propose measures that, if enacted, would dramatically curtail the use of noncompete agreements. Muccifori believes most of the state efforts and the Workplace Mobility Act go too far.
He says that, while no one can seriously dispute that an employer has no legitimate interest in preventing, say, a sandwich maker earning $12 per hour from leaving to join a competitor, the proposed legislation—which comes on the heels of the Obama administration’s “Call to Action” report on noncompete abuses—throws the proverbial “baby out with the bath water” by proposing to invalidate all noncompetes.
“The legislation ignores the important, often vital role that well-crafted, narrowly tailored noncompetes can play to protect trade secrets in a world where employees are increasingly mobile, remote and less supervised, and where information is more portable,” Muccifori says. “Employers and HR leaders should continue to protect company secrets through nondisclosure agreements and, in the right circumstance, noncompete agreements.”
Robert Milligan, a partner in the Los Angeles office of Seyfarth Shaw, says the legislation ignores that, in many instances, noncompetes serve employers’ legitimate business interests, such as the protection of trade secrets and customer goodwill, and traditionally have been the exclusive province of state law.
“An outright ban on such agreements demonstrates a myopic populist worldview that is out of touch with the realities of the business community and the protection of valuable customer relationships and proprietary assets,” he says, adding that it also seeks to regulate key terms that are often included in the sales of businesses on a nationwide basis.
“This legislation goes too far with an outright ban and a clear intrusion on states’ autonomy,” he says. “I don’t expect that the bill in its present form has a strong chance of passage.”
Patrick Bernal, a partner with the Michael Best law firm, says the “interesting thing about the sweeping Workforce Mobility Act” is that, on the surface, it appears to have a better chance of passing than its predecessors. For example, he explains that California’s tech growth—which has coincided with a near total ban on noncompetes—has clearly been an eye-opener for many chambers of commerce. Yet, he still believes passage is a long shot.
“Even if the bill does pass Congress, it is difficult to see President Trump signing it into law,” he says, warning that, regardless of its trajectory, HR leaders should expect more legislative movement on noncompetes on both a state and federal level in the coming years, especially if there is a change in leadership after the 2020 election.
Bernal says HR would face some immediate issues should the bill become law. For example, because the bill grants enforcement powers to the Department of Labor and the Federal Trade Commission and creates a private right of action, it would allow successful plaintiffs to recover reasonable attorneys’ fees.
Finally, Dan Aiken, a partner at Drinker Biddle & Reath in Philadelphia, says, if passed, the bill would have far-reaching negative implications for employers of all sizes, especially smaller family-owned businesses.
For employers, he says, noncompetition agreements are an important tool and insurance policy, adding that, without them, disloyal or dishonest employees would essentially be allowed to walk over to a rival and begin trading on the previous employer’s customer goodwill and business know-how.
“The Workforce Mobility Act completely strips employers of this important protection and, thereby, leaves them exposed to the loss, or substantial reduction in value, of the company’s confidential information and customer relationships,” Aiken says, “both of which are almost impossible to recover, once lost.”