Written by Max Howard

The main goals of non-compete agreements are to encourage employer investments in worker training and innovation and to protect these investments by preventing workers with “trade secrets” to leave for rival firms. However, following a gradual decrease in “business dynamism” after the historic rebound from the Great Recession of 2009, the White House was prompted to investigate further into the implementation and effectiveness of such agreements. The findings from this research suggest that in many cases employers are not actually legally protected by their non-competes and further infer that in many instances the benefit to the employer is low, but the cost to the worker is high.

Is your company actually protected?

A 2013 study commissioned by the Wall Street Journal signals either a rise in the prevalence of non-competes, or significant growth in their enforcement. The law firm Beck Reed Riden LLP found a 61 percent rise from 2002 to 2013 in the number of employees getting sued by former companies for breach of non-compete agreements

As a result, we are seeing a growing movement in states to take action to limit the misuse of non-compete agreements. Several states are banning non- compete agreements outright for certain sectors and occupations. This year, Hawaii banned non- compete agreements for technology jobs, and New Mexico banned them for health care jobs. North Dakorta and Oklahoma banned non-compete agreements outright. Others have taken steps to limit the scope of non-competes. Oregon recently banned non-compete agreements longer than 18 months, while Utah limited the agreements to one year. At the federal level, legislation has been proposed to limit the use of non-compete agreements below a certain income threshold where they are less likely to have valid uses.

Non-compete agreements are also prevalent in states where the courts generally do not enforce them. For example, in California, which does not generally enforce non-compete agreements, 22 percent of workers report that they have signed a non-compete. Survey research shows that many workers are not aware of the lack of enforcement in these states, suggesting that even unenforced non-compete agreements may have deleterious effects.

Is your non-compete in compliance with state law?

Not all non-compete agreements are in compliance with state law. Various states have varying levels of leniency in court regarding how they choose to discipline companies that give out non-compete agreements that are not in line with state law.

Equitable Reform, also known as reformation is the most commonly accepted practice. The majority (about 30) of states are implementing equitable reform approaches, which are the most lenient on employers and require that if workers enter into partially unenforceable contracts then the courts will allow employers to rewrite non-compete contracts to bring the contracts in line with state law, without negating the part of the contract that was in compliance.

Blue Pencil” Doctrine. Some states are implementing a “blue pencil” doctrine, which entails striking out entire offensive clauses from non-compete contracts if doing so renders the remaining language enforceable under the state’s law. Rhode Island, North Carolina, Maryland and Montana all enforce this practice.

“Red Pencil” Doctrine. Lastly, some states provide disincentives for employers to write non-compete contracts that are unenforceable by refusing to enforce and making void a non-compete contract that contains any unenforceable provisions. This practice aims to increase employers’ incentive to write a contract that is fully enforceable. Research from the litigation firm Beck, Reed, and Riden LLP’s 50 state non-compete survey indicates that four states—Nebraska, Virginia, South Carolina, and Wisconsin- are using this approach.

High Costs, Low Benefits

If protection of trade secrets were the main explanation for the high volume of non-compete agreements, then one would expect such agreements to be highly concentrated among workers with advanced education and occupations entrusted with trade secrets. However the findings from this report do not support this notion.

“Only 24 percent of workers report that they possess trade secrets. Moreover, fewer than half of workers who have non-competes report possessing trade secrets, suggesting that trade secrets do not explain the majority of non-compete activity.”

There seems to be a correlation between skilled workers and non-competes. Engineering and computer/mathematical occupations have the highest non-compete prevalence at slightly more than one-third, occupations like personal services and installation and repair also include many workers with non-competes, at about 18 percent. However, an alarming statistic from the brief explained that 15 percent of workers without a four-year college degree are subject to non-competes, and 14 percent of workers earning less than $40,000 have non-competes. This is true even though workers without four-year degrees are half as likely to possess trade secrets as those with four-year degrees, and workers earning less than $40,000 possess trade secrets at less than half the rate of their higher-earning counterparts. Furthermore, industry regulations limit the ability of workers to bargain for higher pay, making it harder for them to seek new jobs. This can cause particular hardship for lower-skill workers who may not have marketable skills or experience.

The Treasury report notes that at least 37 percent of workers are asked to sign non-compete agreements after accepting a job offer.

This also applies to innovators and white-collar workers. Non-competes stifle mobility of workers who can disseminate knowledge and ideas to new startups or companies moving to a region can limit the process that leads to agglomeration economies. Overly broad non-compete provisions could prevent entrepreneurs from starting new business in similar sectors to their current employer, even if they relocate. Though this protects some firms interests, it hurts employers and industries as a whole.

Edited by: Codi Peterson
Allonca Abogados is a Buenos Aires based law firm with an extensive network throughout North and South America. We have ample experience and expertise in corporate law, M&A, startups, and cross border transactions. For further information and questions regarding non-competes and other legal and business advice, please contact us atinfo@alloncalaw.com 


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