The Future of Non-Competes
Non-compete agreements have long been an embattled area of employment law, particularly in startup industries where innovation and intellectual property protection are paramount. Recently, these agreements have come even further under fire, as the White House called on state policymakers to carve back the enforceability of non-compete agreements. North Carolina, in particular, has narrowed their scope significantly. In light of these developments and the ever-present cries that they stifle innovation and are unfair to employees seeking to make a living, it’s worth considering the future and necessity of non-compete agreements.
The White House’s call to action says that states allowing strict enforcement of non-competes “have lower wage growth and lower mobility than states that do not enforce them.” A shining example of this is Silicon Valley. As the startup mecca of the United States, its location prevents innovators there from subjecting employees to non-competes, as they are illegal in California. Yet, companies there continue to grow and succeed, and workers have better mobility. So long as intellectual property is adequately protected, the lack of non-competes does not seem to harm a healthy startup ecosystem.
However, employers have very real concerns about employees jumping ship and taking their knowledge and skills to competitors after investments are made in their training and development. Some of the carve-outs the White House has proposed to “traditional” non-compete terms appear convincing. For example, a prior report found that only 24% of all employees, and less than half of all workers who are subject to non-competes, self-report that they know any of their employer’s trade secrets. So, the White House urged states to ban non-competes for workers who are beneath a certain pay threshold, not privy to trade secrets, laid off or fired without cause or working in public health and safety. In each of these situations, the report concludes, employers need not fear a competitive disadvantage upon termination. Finally, the White House called upon states to adopt “red pencil” policies. Rather than “blue penciling” an unenforceable provision out of a contract and enforcing the rest, the court would void the contract entirely if there are any unenforceable provisions. The White House suggests this will force employers to use only enforceable non-competes from the get-go and drastically reduce limits on worker mobility and innovation.
Additionally, the North Carolina Business Court recently issued an opinion that trims the enforceability of non-competes and non-solicit clauses. The court held that employers cannot restrict employees from working for a competitor or customer of the employer in any capacity, but can restrict employees from working for a competitor or customer on the same type of work performed for the original employer. The court also held that agreements cannot define “competition” so broadly that they include minority ownership or advisory positions with competitors that do not relate to the prior employment.
Both sides of the debate could reasonably concede that limiting the scope of non-competes as the court required would not harm an employer. For example, a programmer who once wrote code for Red Hat should not be violating a non-compete by later performing janitorial services for Microsoft. Instead, the principal issue in the debate is the protection of trade secrets and human capital versus the encouragement of free market competition.
Arguably, the goals of requiring non-competes can be achieved through non-solicitation agreements, proprietary information agreements and nondisclosure agreements. These agreements prevent workers from misusing employer IP or soliciting employer clients. However, employers are understandably wary of resorting to monetary damages after they discover a violation and profits are lost. It is preferable to get injunctive relief to stop an employee before the employee has the chance to divulge secrets. While there are very real risks behind allowing employees to jump ship for competitors or their own businesses, policy must balance these fears against the risk of stifling innovation.
Non-competes are an ever-increasing area of strife for employers and employees alike as the law continues to develop. If you have any questions, please feel free to comment below, email me or connect with me on LinkedIn.
The blog content should not be construed as legal advice.