Edward T. Kang, Kang Haggerty & Fetbroyt

In an article I wrote for the Legal Intelligencer in 2016, titled “Practical Guide to Restrictive Covenants in Pennsylvania and New Jersey,” I offered advice for businesses wanting to draft restrictive covenants that, while covering the business' interests, would not be too overbearing and potentially be found unenforceable by a court. A few years later, a specific type of restrictive covenant—the noncompete agreement—has become a topic of nationwide discussion. There is a nationwide trend that disfavors the use of the noncompete agreement in the employment context.

Many people might imagine that a noncompete agreement, a type of restrictive covenant that frequently used to prevent a company's former employee from working for a competitor, would only apply to those working in high-up positions or who otherwise had access to valuable trade secrets. Yet, even those working at Jimmy Johns have been subject to noncompete clauses that restricted them for working at other sandwich shops or restaurants near their Jimmy Johns for up to two years.

Although examples such as this may seem absurd, they reflect that many people, not just CEOs, have been subject to noncompete agreements throughout their careers. Practitioners should keep in mind that a few states—California, North Dakota and Oklahoma—explicitly prohibit noncompete clauses. While trade secrets are still protected even in these states, the use of noncompete clauses is not allowed. But what is usually at stake for employers wishing to enforce noncompete agreements is not necessarily trade secrets; rather, the employer deems these agreements necessary to protect their “business interests.”

What Business Interests Can be Protected?

In most states, which do allow noncompete clauses on some level, it is still critical that an employer be “reasonable” in assigning noncompete restrictions. In Pennsylvania, for example, the law requires that noncompete clauses are both reasonable in “time and space” as well as “reasonably necessary to protect the employer's legitimate interests.” In other words, the former employee should not be restricted from working for a competitor for a long period of time, and the restriction should only apply at all to a reasonable geographical space (which varies depending on the industry). Employers should be reasonable in deciding who are their actual, nearby competitors—and for how long a former employee must be barred from employment at a potential competitor for their “business interests” to remain protected.  Employers should also be willing to compensate their employees adequately for preventing them from working a competitor.

Many states are cognizant of the potential hardship noncompete clauses can cause an employee. After all, depending on how prevalent a certain industry is in a certain area, these clauses could pose a serious hindrance to those former employees seeking a new job. In Utah, for example, there is a one-year limit for noncompete agreements entered on or after May 10, 2016. Many other states have also imposed certain limits on the length of noncompete agreements, and specifically ensure these agreements are not too harsh on the employee.

Some states also have specific industry exemptions to noncompete clauses. These exemptions range from those working in the healthcare industry and as media broadcasters down to low-income wage earners. Restrictions such as these recognize that if noncompete clauses are placed on certain workers, leaving their current place of employment, whether voluntary or otherwise, might act as a functional barring from the industry they are educated and/or trained to work in.

Although many states allow noncompete clauses, any employer seeking for their employees to agree to one should make sure that these restrictions are reasonable and do not cause undue hardship to an employee that might depart from the company in the future. If these covenants are too restrictive, a noncompete clause might easily be interpreted by a court as an attempt to both smother competition and prevent someone from earning a living and be struck down in its entirety.

States Competing to Ban Noncompetes

Recently, many state legislatures, including Pennsylvania, have begun to consider moving in the way of California, North Dakota and Oklahoma. Pennsylvania House Bill 1938, although it has sat in the state legislature for over a year now, specifically seeks to ban noncompete clauses. It also specifically delineates a private cause of action for any employer seeking to enforce such a covenant—and any employer who would violate this proposed law would be subject to compensatory and punitive damages. Naturally, there would be a few exceptions to the rule (such as with the sale of a business).

The level of success of these kinds of bills is hard to predict. In New Hampshire, for example, a similar proposed bill was struck down last year. Yet in Massachusetts last year, a law passed that not only restricted noncompete agreements to less than 12 months but also required an employer seeking such an agreement to pay 50% of a workers' base salary to the former employee until they become reemployed. Many recent revisions to noncompete agreement laws, or at least serious considerations of revisions, have occurred in the last year. Undoubtedly, this is a hot issue that will only gain more traction as states discuss and pass these bills.

The bipartisan nature of the support behind restricting noncompete laws does potentially suggest a stronger chance for nationwide success. For example, Sen. Elizabeth Warren, current Democratic candidate for president, co-sponsored the Workforce Mobility Act, a potential federal law that would broadly ban all noncompetes for employers and employees engaged in commerce. At the same time, former Republican candidate for president and current Florida Sen. Marco Rubio also recently proposed a “Freedom to Compete Act” in his home state, aimed at banning noncompete clauses for lower-wage workers. Both Republicans and Democrats nationwide have perceived the noncompete clause as unnecessarily restrictive toward workers.

Whether politicians' desire to restrict noncompete clauses comes from a belief in upholding business competition or in protecting workers' rights, it is no doubt that this is certainly a cause that draws support from both sides of the aisle.

The Future of Noncompetes

Although some bills aiming to restrict noncompete clauses have been slow to gain traction in their respective legislatures, that is no indication that employers should wait until a bill is passed to consider its potential effects. Even if bills do not pass, it appears the tide of opinion against noncompete agreements is rising. Will a potential employee agree to work for you if you present a highly restrictive noncompete agreement to them upon hiring? Many workers, especially younger employees, do not foresee staying at their employer for years on end. If an employer wants to prevent its employees from working for a “competitor” for a seemingly draconian amount of time, it might lose them entirely.

This is not to say that employers should not fret about rising future levels of competition, potential poaching, and loss of valuable trade secrets. Even with these potential revisions in the law, governments, both state and federal, understand that employers have a right to protect their own interests. It is simply important that employers do not overstretch their hand by confusing the protection of their own interests with the restriction of those of their workers. A practitioner representing an employer who deeply believes in the necessity of noncompete agreements, he should sit down with the client and develop a reasonable plan under the applicable laws. The days of using a form noncompete agreement, even if used only for executives, are seemingly over. Although it may seem unnecessary from the client's perspective, it also might save them from a future lawsuit by an unhappy former employee who feels the client has hindered their financial and professional success. This process would also help the client better identify and understand their own business interests and goals.

Conclusion

The revision, or outright ban, on noncompete agreements, within the last few years, has slowly turned into a topic of both state and federal deliberation. Their future in Pennsylvania, at least for the moment, appears to be on hold. But as it stands, employers everywhere should begin seriously reconsidering their need for noncompete agreements and the specifics of any they determine are necessary. Remember that your clients' business interests must be legitimate, and they must prepare for potential concessions to their former employees—such as compensation—if they decide they need to use noncompete agreements. Considering the bipartisan support behind these suggested bills aimed at restricting and even limiting noncompetes, and the momentum they have gathered, it would not be surprising to see a state like Pennsylvania also revise the legality and scope of noncompete agreements.

Edward T. Kang is the managing member of Kang, Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities. Conctact him at [email protected].