Lawmakers and courts continued to demonstrate hostility toward noncompete and no-hire agreements in 2021. The activity underscores employers’ need to stay current on the diverse state-specific limitations governing restrictive covenants, new federal activity in the area, and ongoing case law developments.
Advice Based on National Trends
In light of the trends, national employers should:
- Be selective in identifying the categories of employees required to sign the agreements;
- Rely on allowable choice-of-law and -venue provisions to maximize the chances of enforceability;
- Keep a keen eye on likely federal developments in the year ahead; and
- Avoid no-poach agreements with employers as a poor substitute for narrowly tailored employee noncompetes.
Below is a list of the top 10 developments in noncompete law during 2021.
Biden Administration Issues Executive Order
On July 9, 2021, President Joe Biden issued an Executive Order (EO) on “Promoting Competition in the American Economy.” Among other things, it encouraged the Federal Trade Commission (FTC) to ban or limit noncompetes. Notably, the order didn’t create new rules to curtail the use of noncompete agreements. Instead, supplementary materials released by the White House included a “Fact Sheet” indicating the FTC should “ban or limit” the agreements.
In the months since the EO, the FTC hasn’t yet issued any official rulemaking; but the agency and U.S. Department of Justice’s Antitrust Division held a joint two-day workshop in early December titled “Making Competition Work: Promoting Competition in Labor Markets,” which explored the intersection of antitrust and labor laws. The workshop didn’t provide any firm guidance on noncompetes, but speakers from both agencies indicated the administration’s intention is to use both enforcement and rulemaking powers to limit their unfair use in the labor market.
Congress Contemplates Federal Ban
Federal legislators also have indicated a desire to curb the use of noncompete agreements. In February 2021, a bipartisan group of legislators introduced the Workforce Mobility Act (WMA) in the House and the Senate. The WMA would prohibit the use of noncompetes except during the sale of a business or the dissolution or disassociation of a partnership. Not only would noncompete provisions entered into outside of the limited circumstances be void, but employers would also be subject to civil fines for using them.
Both the FTC and the Department of Labor (DOL) would be empowered to enforce the WMA, and aggrieved employees would be allowed to pursue a private claim in connection with any actual damages. The measure, which is currently in a House committee, contains a fee-shifting provision for successful claims.
District of Columbia Bans Noncompetes
On January 11, 2021, the mayor of Washington, D.C., signed the D.C. Ban on Non-Compete Agreements Amendment Act of 2020, one of the broadest prohibitions in the country against their use. The Act bans private employers operating within the District from requiring an individual who performs work there to sign a noncompete. The measure contains limited exceptions, including in the context of the sale of a business.
Notably, the ban reaches beyond postemployment restrictive covenants to workplace policies and agreements that prohibit outside employment. Such “anti-moonlighting provisions” are common fixtures in standard employment-related policies, including employee handbooks, codes of conduct, and conflict-of-interest policies.
Employers in the District will need to provide written notice to their workers within 90 days of the Act’s effective date, April 1, 2022. The legislation doesn’t apply to agreements entered into before then. Employers with operations and employees in Washington should carefully review their employment policies as well as their restrictive covenant agreement forms to ensure compliance with the upcoming law.
Illinois Amends Freedom to Work Act
The Illinois Freedom to Work Act, passed in 2016, initially banned the use of noncompete agreements for low-wage workers. New amendments, effective on January 1, 2022, further limit the use of restrictive covenants by increasing the income thresholds for any employee earning at least $75,000 annually for noncompete agreements and $45,000 for nonsolicitation provisions.
The amended law also codifies Illinois case law regarding sufficient consideration, i.e., something of value given in return for signing the noncompete agreement. Under the law, employers will need to provide either (1) a two-year employment commitment, (2) employment plus professional or financial benefits, or (3) some form of professional or financial benefit. Initial employment isn’t enough.
Noncompete and nonsolicitation agreements also must note the employee may consult with an attorney and be given a 14-day waivable consideration period. Employers must incorporate this timeline into any onboarding documents. The law empowers the state attorney general to bring claims with civil penalties of up to $5,000 for initial violations and $10,000 for repeat offenses. Employees also may recover attorneys’ fees if they prevail in a claim challenging a restrictive covenant.
Illinois employers should be working with their HR pros to update all agreements to include the 14-day consideration period and reassessing which employees are being asked to enter into noncompete and nonsolicitation provisions to ensure compliance with the law’s new income thresholds.
Nevada Amends Law Regulating Restrictive Covenants
Nevada amended its statute governing restrictive covenants. The changes, effective on October 1, 2021, include banning (1) noncompete agreements for employees paid on an hourly basis and (2) nonsolicitation provisions that prohibit the servicing of customers or clients. Nonsolicitation provisions that prohibit the mere solicitation of clients are permissible as long as the clients in question are limited to the services solicited by the employee during their employment.
The revised statute now contains a fee-shifting provision for successful claims filed by an employee. It is silent, however, about whether the amendments will retroactively apply to agreements entered into before October 1.
Employers in Nevada will need to reassess which employees are being asked to enter into the restrictive covenants and review the terms of their existing nonsolicitation provisions to confirm they comply with the law’s revised wording.
Oregon Further Amends Law Regulating Restrictive Covenants
On May 21, 2021, Oregon’s governor signed an amendment to the state’s noncompete statute (1) shortening the permissible posttermination duration of an agreement from 18 to 12 months and (2) altering the income threshold used to determine whether an employee can be subject to it. The latter had previously been expressed as a formula based on median income for a four-person family. The revised statute uses a salary threshold of $100,533 (gross salary and commission).
Nonexempt employees in Oregon can’t be asked to sign a noncompete. The revisions to the statute became effective on January 1, 2022, but don’t apply retroactively. Employers in the state should review their noncompete agreement forms to confirm their terms comply with the newly revised law.
No-Hire Agreements Become Un-Enforceable in Pennsylvania
In April 2021, the Pennsylvania Supreme Court found a no-hire clause in an agreement between a logistics provider and a trucking company was unenforceable because it constituted an unreasonable restraint on trade. In Pittsburgh Logistics Systems, Inc. v. Beemac Trucking, LLC, the logistics provider entered into a services contract with the trucking company in which the latter agreed to refrain from hiring or soliciting any of the other company’s employees during the term of their contract and for two years thereafter.
After setting forth an exhaustive discussion on how other courts across the country have dealt with no-hire provisions, the Pennsylvania high court found the clause at issue was overbroad. In particular, while it might have enforced the agreement if it had prohibited only the hiring of employees with specialized knowledge who had worked with the trucking company, the provision at issue prohibited the hiring of all employees of the logistics provider and its affiliates. The court also noted the provision essentially imposed a noncompete on the logistics provider’s employees without their knowledge or consent.
Going forward, Pennsylvania employers should first consider nonsolicitation agreements in lieu of no-hire provisions. If a no-hire agreement is necessary, they should ensure (1) it is narrowly tailored to the protectable interest and (2) employees have consented to the restriction by, for example, signing noncompete agreements.
No-Poach Agreement Draws Federal Criminal Charges
In yet another cautionary tale for employers seeking to enter into no-hire agreements with business partners, federal prosecutors obtained a criminal indictment on December 15, 2021, against six executives and managers from Pratt & Whitney and several outsource engineering suppliers for allegedly conspiring to refrain from soliciting or hiring each other’s workers. The execs were charged with criminal conspiracy in restraint of trade for the arrangement, which allegedly had been in place for nearly a decade and had affected thousands of engineers and other skilled workers.
The same week as the indictments, attorneys for Pratt & Whitney workers filed two putative class actions in which they alleged the conspiracy adversely affected their wages and careers.
Georgia Appeals Court Reverses Indefinite Extension of Noncompete as Sanction
In October 2021, the Georgia Court of Appeals found a trial court abused its discretion when it indefinitely extended a noncompete prohibition after the defending parties defied the district court’s injunction. In Daneshgari v. Patriot Towing Services, LLC, the plaintiff purchased a towing business from the defendants in June 2016. As part of the deal, the sellers agreed not to start or work for a competing business within 150 miles through June 2020. In contravention of the agreement, they started a competing business shortly after the sale.
Accordingly, the trial court issued an order in June 2018 barring the sellers from further violation of their noncompete obligations. Nonetheless, they continued their business. In June 2019, the district court held them in contempt and ordered them to pay $20,000 in attorneys’ fees. They paid the sanctions but continued to defy the injunction. After a second contempt hearing in August 2020, the court issued another fee award against the sellers and extended the noncompete indefinitely.
Citing a Georgia Supreme Court decision that implicitly suggested trial courts may not extend a noncompete’s length beyond its contractual terms, the court of appeals reversed the district court’s indefinite extension of the period as an improper attempt to effectively rewrite the parties’ contract. While extending the term of the noncompete was an abuse of the trial court’s discretion, “a trial court is not without other means to address a party’s contempt,” the appeals court noted.
SCOTUS Resolves Circuit Split on CFAA
In June 2021, the U.S. Supreme Court resolved a split among the federal circuit courts regarding the proper scope of the Computer Fraud and Abuse Act (CFAA). In Van Buren v. United States, the Court looked at what constitutes “unauthorized access” for purposes of stating a claim under the CFAA and whether an employer can assert such a claim against an employee who is provided access to a database but accesses the system for unauthorized reasons.
Rejecting the circuit court decisions that found CFAA violations when authorized users engaged in unauthorized use, the Supreme Court ruled the Act targets only persons who aren’t provided access to a database, such as external hackers or internal users who improperly gain access to a part of a computer system to which they don’t have privileges. The ruling essentially closes the door on employers seeking to assert a CFAA claim against departing employees who use their authorized access to areas of an employer’s computer system for improper purposes, such as the misappropriation of confidential files.
Charles F. Knapp and Kerry C. Zaroogian are attorneys with Faegre Drinker. You can reach them at chuck.knapp@faegredrinker.com or kerry.zaroogian@faegredrinker.com.