The top 10 non-compete law developments in 2021 demonstrated a continued hostility by lawmakers and courts toward noncompetition and no-hire agreements, as well as the need for employers to stay current on the diverse state-specific limitations governing restrictive covenants, new federal activity in the area and ongoing case law developments. In light of these trends, national employers would do well to (1) be selective in identifying those categories of employees required to sign such agreements, (2) rely on allowable choice-of-law and venue provisions to maximize the chances of enforceability, (3) keep a keen eye on likely federal developments in the year ahead and (4) avoid no-poach agreements with employers as a poor substitute for narrowly tailored employee non-compete agreements.
1. Biden Administration Issues Executive Order on Promoting Competition; FTC Rulemaking on the Horizon
On July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy. The Executive Order, among other things, encourages the Federal Trade Commission (FTC) to ban or limit non-compete agreements. Notably, the Executive Order does not create new rules that curtail the use of non-compete agreements, but supplementary materials released by the White House with the Executive Order included a “Fact Sheet,” which indicated that the FTC should “ban or limit non-compete agreements.” In the months since the Executive Order, the FTC has not yet issued any official rulemaking; however, the FTC and the Department of Justice’s Antitrust Division held a joint agency 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 did not provide any firm guidance on the use of non-compete agreements, but speakers from both agencies indicated that it is the administration’s intention to use both enforcement and rulemaking powers to limit the unfair use of non-compete agreements within the labor market.
2. Congress Contemplates Federal Ban on Non-Competes Under the Workforce Mobility Act
Federal legislators have also indicated a desire to curb the use of non-compete agreements. In February, a bipartisan group of legislators introduced the Workforce Mobility Act of 2021 in the House and the Senate. The Workforce Mobility Act would prohibit the use of non-compete agreements except in the context of the sale of a business or the dissolution or disassociation of a partnership. Not only would non-compete provisions entered into outside of these limited circumstances be void, but employers would also be subject to civil fines for the use of such agreements. Both the FTC and the Department of Labor would be empowered to enforce the Workforce Mobility Act, and aggrieved employees would be allowed to pursue a private right of action in connection with any actual damages. The act contains a fee-shifting provision for successful claims. The Workforce Mobility Act is currently in committee in the House.
3. District of Columbia Bans Non-Compete Agreements
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 on the use of non-compete agreements. The act bans private employers that operate within D.C. from requiring an individual who performs work in Washington, D.C. to sign a non-compete agreement. The act contains limited exceptions, including non-compete agreements in the context of the sale of a business. Notably, the ban reaches beyond post-employment restrictive covenants to workplace policies and agreements that prohibit outside employment during 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 within Washington, D.C. will need to provide specific written notice to their workers within 90 days of the act’s applicability date, which will be April 1, 2022. The act does not apply to agreements entered into prior to April 1, 2022. Employers who have operations and employees within Washington, D.C. should carefully review their employment policies as well as their form restrictive covenant agreements to ensure compliance with the upcoming law. They should also prepare to comply with the notice requirement for all new and current Washington, D.C. employees.
4. Illinois Amends Freedom to Work Act
As of January. 1, 2022, more aggressive amendments to Illinois’ current legislation regulating non-compete agreements have gone into effect. Illinois’s Freedom to Work Act, passed in 2016, had initially banned the use of non-compete agreements for low-wage workers. The new amendments further limit the use of restrictive covenants — both non-compete and non-solicit agreements — by increasing the income thresholds for any employee earning at least $75,000 annually for non-compete agreements and $45,000 for non-solicitation provisions. The law also codifies Illinois case law regarding sufficient consideration for a non-compete agreement. As such, for a non-compete to be supported by sufficient consideration, employers will need to provide either a two-year employment commitment, employment plus professional or financial benefits, or some form of professional or financial benefit. Initial employment is not sufficient consideration. The amended law also requires employers to include in their non-compete and non-solicit agreements a notice that the employee may consult with an attorney and must be given a 14-day waivable consideration period. Employers will need to incorporate this timeline into any onboarding documents. The amended law empowers the state attorney general to bring claims with civil penalties up to $5,000 for initial violations and $10,000 for repeat violations. Employees may also recover attorneys’ fees if they prevail in a claim challenging a restrictive covenant. Illinois employers should be working with their HR professionals to update all agreements to include the 14-day consideration period and reassessing which employees are being asked to enter into non-compete and non-solicit provisions to ensure compliance with the law’s new income thresholds.
5. Nevada Amends Law Regulating Restrictive Covenants
Nevada also amended its current statute governing restrictive covenant agreements, with the amendments going into effect on Oct. 1, 2021. The changes include banning non-compete agreements for employees paid on an hourly basis and banning non-solicitation provisions that prohibit the servicing of customers or clients. Non-solicitation provisions that prohibit the mere solicitation of clients are permissible as long as the clients in question are limited to those services or solicited by the employee during their employment. The revised statute now contains a fee-shifting provision for successful claims brought by an employee. The statute is silent as to whether these amendments will retroactively apply to agreements entered into before Oct. 1, 2021. Employers in Nevada will need to reassess which employees are being asked to enter into non-compete and non-solicit agreements and should review the terms of their existing non-solicitation provisions to confirm that they comply with the revised wording of the law.
6. Oregon Further Amends Law Regulating Restrictive Covenants
On May 21, 2021, Oregon’s governor signed into law a further amendment to Oregon Revised Statute Section 653.295, the second such amendment since the state began regulating non-compete provisions in 2016. The revisions to the law include shortening the permissible post-termination duration of a non-compete from 18 months to 12 months and altering the income threshold used to determine whether an employee can be subject to a non-compete agreement. The latter had previously been expressed as a formula based on median family income for a four-person family. The revised statute uses a salary threshold of $100,533 (gross salary and commission). Non-exempt employees cannot be asked to sign a non-compete in Oregon. Many facets of the original statute remain in effect. The revisions to the statute became effective on January 1, 2022, but do not apply retroactively. Oregon employers should review their form non-compete agreements to confirm that their terms comply with the newly revised law.
7. Pennsylvania Supreme Court Finds No-Hire Agreement Unenforceable
In April 2021, the Pennsylvania Supreme Court ruled that 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, 2021 WL 1676399 (Apr. 29, 2021), a logistics provider entered into a services contract with a trucking company in which the trucking company agreed to refrain from hiring or soliciting any of the logistics provider’s employees during the term of the parties’ 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 Supreme Court found the no-hire provision at issue to be unenforceable because of its over breadth. In particular, while the court indicated it might have enforced the agreement had it only prohibited 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 that the provision was unreasonable because it essentially imposed a non-compete on the logistics provider’s employees without their knowledge or consent. Going forward, Pennsylvania employers should first consider non-solicitation agreements in lieu of no-hire agreements. If a no-hire agreement is necessary, Pennsylvania employers should ensure both that the provision is narrowly tailored to the protectable interest and that impacted employees have consented to the restriction by, for example, signing non-compete agreements.
8. U.S. Attorney’s Office Pursues Criminal Charges Against Aerospace Executives for No-Poach Agreements
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 executives were charged with criminal conspiracy in restraint of trade for the arrangement, which allegedly had been in place for nearly a decade and had impacted 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 that the conspiracy adversely impacted their wages and careers.
9. Georgia Court of Appeals Strikes Down Trial Court’s Order Indefinitely Extending Non-compete as Sanction.
In October 2021, the Georgia Court of Appeals found that a trial court abused its discretion when it indefinitely extended a non-compete prohibition after the defendants defied the district court’s injunction. In Daneshgari v. Patriot Towing Services, LLC, 864 S.E.2d 710 (Ga. App. 2021), the plaintiff purchased a towing business from the defendants in June 2016. As part of that deal, the defendants agreed not to start or work for a competing business within 150 miles through June 2020. In contravention of that agreement, the defendants started a competing business shortly after the sale. Accordingly, the trial court issued an order in June 2018 enjoining the defendants from further violation of their non-compete obligations. Nonetheless, the defendants continued their business. In June 2019, the district court held the defendants in contempt and ordered them to pay $20,000 in attorneys’ fees. The defendants 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 defendants and extended the non-compete indefinitely. Citing a Georgia Supreme Court decision that implicitly suggested that trial courts may not extend the length of a non-compete beyond its contractual terms, the Georgia Court of Appeals reversed the district court’s indefinite extension of the non-compete period as an improper attempt to effectively rewrite the parties’ contract. The court went on to note that while extending the term of the non-compete was an abuse of the trial court’s discretion, “a trial court is not without other means to address a party’s contempt.”
10. SCOTUS Resolves Circuit Split on CFAA
In June 2021, the United States 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, 593 U.S. __ (2021), the Court looked at what constitutes “unauthorized access” for purposes of stating a claim under CFAA and whether an employer can assert a CFAA claim against an employee who is provided access to a database but accesses the database for unauthorized reasons. Rejecting those circuit court decisions that found CFAA violations when authorized users engaged in unauthorized use, the Supreme Court ruled that CFAA only targets persons who are not 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 do not have privileges. Van Buren 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.