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Is this the end of non-compete agreements?

by | Jul 16, 2021 | Corporate Litigation

When a business shares trade secrets and innovations, and trains valuable members of the organization, it seems reasonable to expect those members to agree to stay with the business, or at least not join a nearby competitor pursuant to a non-compete agreement. These non-compete agreements, which are often included as a provision within an employment contract or are separately set forth in a subsequent agreement, provide protection to the business organization.

Non-compete agreements are disfavored by employees because they can hinder the ability of the employee to find a different job.  Accordingly, employees have pushed back against non-compete agreements, and lawmakers are listening.  President Biden recently signed an executive order that encourages a ban on non-compete agreements. President Biden’s administration estimates that non-compete agreements impact between 36 and 60 million workers throughout the United States, and it has voiced a concern that these agreements impede economic growth.

How would a ban on non-compete agreements impact businesses?

Critics of the executive order contend that if the ban goes into effect, it will have a negative impact on small and medium-sized businesses. They point out that non-compete agreements are often one of the main tools protecting the trade secrets and proprietary information of a business. A ban on non-competes would put this confidential information at risk.

Without the protections provided by non-compete agreements, businesses would need to rely on various intellectual property laws enforced via litigation. Although helpful, litigation in this area of law often is very expensive. The existence of a valid non-compete agreement acts as a safety net before needing to move forward with intellectual property litigation and provides a more efficient option to protect the interests of small businesses.

What will likely happen?

Although an outright ban on non-compete agreements seems unlikely, a significant narrowing of the use and enforceability of non-compete agreements is certainly possible. This could lead to a shift away from these agreements for lower-level or blue-collar employees and a focus instead on using them only with high-level employees that may have access to sensitive business information.

How can I make sure my non-compete agreements withstand a challenge?

Reasonableness is often the key to success when it comes to the enforcement of a non-compete agreement. A reasonable duration and geographic scope are critically important.  In addition, such an agreement with an employee who has access to sensitive and proprietary information or who has received high-level training may increase the likelihood that the non-compete is found to be valid and enforceable.

It is also important to understand that each state has its own nuances and rules when it comes to non-compete agreements, so take the time to make sure your agreement falls within the bounds of the rules in the state where you operate your business or have employees. This can help to better ensure your business has a non-compete that will withstand judicial scrutiny.