Generally speaking, employees in the United States have unlimited freedom to move between jobs — that is, unless the employee signed a non-compete agreement. These agreements – often used to protect a company’s trade secrets and client relationships — bar employees from engaging in competitive activities with their former employer for a fixed period of time post-employment.
Over the past few decades, the use of non-compete agreements has grown considerably across the US – and with their prevalence has come controversy. As Aimee Keane’s recent reporting in the Financial Times explains, non-compete agreements have come under recent attack from US government officials claiming that such agreements, especially for employees who are not privy to trade secrets, confidential or proprietary information, impede economic growth and employee mobility.
Indeed, in the last year alone, legislators in several states have introduced, and in some cases even passed, bills to curtail the use of non-compete agreements. Additionally, several state attorneys general have launched aggressive investigations into specific companies’ non-compete agreements, to gauge whether the agreements are truly necessary to protect legitimate business interests or, rather, whether they are instead a mechanism to unfairly deter competition. The investigations have already resulted in several companies agreeing to refrain from using non-competes in the future and from enforcing preexisting agreements, at least for certain employees.
Amidst this groundswell of opposition to non-compete agreements, here are five things companies with US operations may want to keep in mind:
1. First, and perhaps most importantly, carefully consider on a case-by-case basis whether it is appropriate to have an employee sign a non-compete agreement. Businesses need not abandon the use of non-compete agreements altogether; they must simply be more vigilant about which workers are asked to sign non-competes. For key employees like executives, these agreements still tend to serve an important and justifiable purpose.
2. Explore whether other means, such as a confidentiality agreement and/or a post-employment ban on soliciting clients and colleagues, can be used in lieu of a traditional non-compete agreement to protect corporate information and goodwill. American courts are typically more receptive to these types of restrictions.
3. Requiring all employees – from entry-level workers to senior executives – to sign non-compete agreements should be generally avoided because it may invite unwanted attention.
4. Despite recent attempts to eradicate non-compete agreements, tread lightly if you hire your competitors’ employees. If a new hire is bound by a non-compete with your competitor, both you and the employee are prime targets for litigation. And even though a court may ultimately conclude that the non-compete is unenforceable, the time and money expended during litigation will be considerable.
5. This point is important to keep in mind: non-compete agreements are generally disfavored in most jurisdictions, absent a protectable business interest. Prudent employers should therefore judiciously choose when to use non-compete agreements, and should only extend them to those employees whose defection to a competitor would most significantly pose a threat to corporate stability.
As laws surrounding the use of non-compete agreements change, businesses too must adapt. While a blanket ban on non-compete agreements in the US is unlikely, the bottom line is employers must begin to consider, if they have not already done so, for which employees such agreements are truly necessary.
Cindy Minniti is a labor and employment attorney at Reed Smith and also serves as the managing partner of the firm’s New York office. Reed Smith is a global relationship law firm, with more than 1,700 lawyers in 26 offices throughout Europe, the Middle East, Asia and the United States.