Concerns Over Economic Growth Leads Some States To Limit Non-Compete Agreements

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The Wall Street Journal recently reported a more than 60% rise in non-compete litigation over the past decade.[1]  The article notes that while non-compete agreements were once largely aimed at top executives, they are now “’reaching wider and deeper within organizations’ to include sales representatives, engineers and people involved in research and innovation.”

The article observes that though non-compete agreements allow employers to protect valuable assets and significant investments in their workforce, such agreements also have a chilling effect.  The threat of litigation makes it less likely that employees will change jobs, start their own businesses or join a startup or small firm.

According to Alan Hyde, a professor at Rutgers University School of Law, “while employers may benefit from enforcing the agreements, there is little evidence of any social or economic advantage:  ‘You have slower growth, fewer startups, fewer patents and the loss of brains to jurisdictions that don’t enforce the agreements.’”  For many startups, non-compete agreements often limit the recruiting process due to the potential cost of litigation and the expense of paying a non-productive employee until the agreement expires.

Olav Sorenson, a Yale University management professor, found non-compete agreements appeared to impede innovation.  States that did not enforce non-compete agreements saw more venture capital on the formation of startups, biotech spinoffs and job growth.

As result of the negative economic impact, some states have enacted or are considering laws which limit non-compete agreements.  For example, California voids many non-compete agreements.  New Hampshire voids non-compete agreements which are not provided before or when a job offer is made, or when the current job position changes.  Massachusetts is set to hold hearings on a bill that would limit non-compete agreements to six months.  And New Jersey and Minnesota have introduced legislation that would limit or void non-compete agreements.

Georgia, on the other hand, recently went the other way by enacting legislation in 2011 (OCGA §13-8-50, et seq.) that actually made it easier for employers to enforce non-compete legislation.  The findings of the Georgia legislature run counter to the conclusions of the experts quoted in the WSJ article – the lawmakers determined that Georgia’s prior body of law that greatly favored employees actually impeded efforts to attract new businesses to the state and retain existing ones.

Though Tennessee has not enacted legislation limiting non-compete agreements for economic reasons, the economic impact influences the balance between the need to protect an employer’s legitimate business interest and the desire for free trade.  In Tennessee, the restrictions of a non-compete agreement must be no greater than is necessary to protect the employer’s business interests.  If the restrictions are too great, a court can void or rewrite the agreement.

[1] Ruth Simon and Angus Loten, Litigation Over Noncompete Clauses is Rising, Wall St. J., Aug. 15, 2013, at B1.

 

Topics:  Non-Compete Agreements

Published In: Intellectual Property Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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