On October 25, 2016, the White House published a “State Call to Action,” urging states to reform their noncompetition laws. The Call to Action follows an earlier report from the White House which concluded that noncompetition agreements may have a detrimental effect on workers by limiting their mobility and inhibiting innovation. In its “Call to Action,” the White House recommends that state lawmakers adopt “best practice policy objectives” to reduce the “misuse” of non-compete agreements, including:

1. Banning non-compete clauses for categories of workers, such as workers under a certain wage threshold, workers in certain occupations that promote public health and safety, workers who are unlikely to possess trade secrets, or those who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause;
2. Improving transparency and fairness of non-compete agreements by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted (reasoning that an applicant who has accepted an offer and declined other positions may have less bargaining power) and providing consideration over and above continued employment for workers who sign non-compete agreements; or
3. Incentivizing employers to write enforceable contracts, and encouraging the elimination of unenforceable provisions by, for example, promoting the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.

Responding to the White House’s Call to Action, New York Attorney General Eric T. Schneiderman announced that he would introduce legislation in 2017 “to curb the rampant misuse of non-compete agreements, which depress wages and limit economic mobility.”  Called the “nation’s most comprehensive bill to curb widespread misuse of non-compete agreements,” Schneiderman’s proposed bill would:

• Prohibit the use of non-competes for any employee below the salary threshold set by Labor Law Section 190(7), currently $900 per week;
• Prohibit the use of non-compete agreements that are broader than needed to protect the employer’s trade secrets or confidential information;
• Require non-compete agreements to be provided to employees before a job offer is extended;
• Require employers to pay employees additional consideration (money) if they sign non-compete agreements;
• Limit the permissible duration for non-compete agreements; and
• Create a private right of action with remedies including liquidated damages for violations.

Further, the Department of Justice and Federal Trade Commission published the Antitrust Guidelines for Human Resources Professionals, outlining an aggressive policy to investigate and punish employers and individual human resources employees who enter into unlawful agreements concerning employee recruitment or retention.  Specifically, the guidance explains that agreements among employers not to recruit certain employees or not to compete on terms of compensation are illegal.  The Department of Justice announced that it would criminally investigate “naked no-poaching or wage fixing agreements” that are unrelated to legitimate collaboration between businesses.

Employers that use noncompetition agreements should pay careful attention to these quickly evolving developments. If some of the suggested restrictions are adopted, employers may be completely barred from using noncompetition restrictions with respect to certain categories of employees simply because those employees do not earn a minimum amount in wages.  Additionally, drafting noncompetition agreements could become an even more complicated and uncertain process.  While many states already require employers to establish a legitimate business interest that supports the use of a noncompetition clause, and prohibit overbroad restrictive covenants, the proposed changes to noncompetition standards would impose significant costs on employers that utilize restrictions that are subsequently found to be overbroad.

We will provide more information on these developments as they become available.