At Dechert, we have been closely monitoring legal developments with respect to the use of non-competes and other restrictive covenants and have observed a growing trend in the United States, the United Kingdom and France against enforcement of non-compete clauses in employment agreements.
Non-compete clauses in employment agreements are a common tool used by employers to protect their business interests. These clauses are frequently included in employment documentation and have the effect of restricting employees from engaging in similar employment after leaving their current role. However, the enforceability of these clauses varies significantly across jurisdictions.
The common trend against non-compete clauses is driven by concerns about their potential to limit labor mobility, stifle competition and unfairly restrict employees' rights.
To help you navigate these concerns and potential solutions, we will publish thematic quizzes on the alternatives to non-compete clauses. These quizzes will delve into the intricacies of these alternatives, providing a comprehensive understanding of the options available to employers. Stay tuned for these quizzes, coming soon!
But, before receiving our quizzes we strongly invite you to read the following OnPoint which provides an overview of this trend in the United States, the United Kingdom and France and highlights the key considerations and recent developments in each jurisdiction.
USA
In the United States, there have been several legislative and regulatory initiatives to restrict or prohibit the use of non-competes, the most notable being the proposed rule issued by the Federal Trade Commission in January 2023 that would ban the use of non-competes in almost all situations. Courts have also been examining non-compete clauses more rigorously to ascertain if they are reasonable and safeguard legitimate employer interests. As an illustration, the Delaware Chancery Court has issued a series of decisions over the past eighteen months in which it struck down restrictive covenants in various contexts [link to the OnPoint], although the Delaware Supreme Court recently issued a decision reversing one of these decisions and finding that Delaware’s policy favoring freedom of contract dictates that “forfeiture for competition” provisions between sophisticated parties should be enforced in accordance with their terms, see Cantor Fitzgerald, L.P. v. Ainslie, 2024 WL 315193 (Del. Jan. 29, 2024).
This trend is expected to persist, with the enforcement of non-compete clauses for lower-wage workers becoming increasingly difficult, and covenants for executives and higher-level employees being scrutinized more closely to ensure they are narrowly tailored to protect valid business interests.
United Kingdom
In the UK, debates around the future of non-compete clauses are intensifying. These clauses have always been subject to rigorous scrutiny in legal disputes.
The UK government has been contemplating significant reforms to non-compete clauses in employment contracts. In December 2020, it initiated a consultation on measures to reform non-compete clauses in employment contracts. The consultation proposed several measures such as:
- Compulsory compensation for employees bound by non-compete clauses.
- A statutory limit of three months on the duration of non-compete clauses.
- Disclosure requirements for employers using non-compete clauses.
- An outright ban on non-compete clauses.
The consultation concluded on February 26, 2021. On May 12, 2023, the government released its response to the 2020 consultation, confirming its decision to impose a statutory cap of three months on non-compete clauses. This cap will be applicable only to employment and worker contracts, and not to other workplace contracts like LLP agreements or shareholder agreements. For non-compete clauses with a duration of less than three months, the existing common law principles of enforceability will apply. There will be no cap for other restrictive covenants, such as non-dealing or non-solicit clauses.
As of now, there is no clarity on when and if the cap will be implemented. The government has stated that this will happen "when Parliamentary time allows." Therefore, the future is likely to witness regulations and restrictions on the use of non-competes.
France
In France, there is a discernible shift against non-compete clauses as well. Employment Courts are increasingly adopting a stringent interpretation of the conditions that validate non-compete clauses. For instance, they frequently deem the geographical scope as overly broad or the financial compensation as inadequate. The enforceability of all clauses hinges on the specifics of each case, making the validity of the non-compete clauses very difficult to assess.
**
Despite such trends, employers still need to protect their business interests post-termination of employment. This raises important questions about the legal solutions available to employers in the absence of non-compete clauses.
Could alternative post-termination covenants provide the necessary protection? Could commercial agreements between employers serve as a viable alternative? These are complex questions that require a deep understanding of employment law and the evolving legal landscape.
