A Sign Of Things To Come? D.C. Bans Employee Non-Competes That Apply To Current Employees And To Post-Employment Activity

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  • UPDATE (4-5-21): The D.C. law is “effective” as of March 21, 2021 but will not be “applicable” until the Fall of 2021. Here are the details: There has been confusion over when compliance with the new D.C. law will be required. The uncertainty is caused by the presence of both the terms “effective date” and “applicability date” in the new law without explaining their meanings. The “effective date” is the date the bill became law under the terms of the District’s home rule law – a process explained in this article. The new Act became “effective” on March 21, 2021. The “applicability date” is different, however. The Act states in Section 302 that it will not become applicable until “the date of inclusion of its fiscal effect in an approved budget and financial plan” for the District – a requirement imposed by another D.C. law. Because the financial impact of the new law was not included in the budget and financial plan approved last year, it is not yet applicable but will satisfy that requirement in the Fall of 2021. It is the applicability date that will trigger compliance obligations for D.C. employers.

The District of Columbia Council unanimously passed, and on January 11 Mayor Bowser signed, The Ban on Non-Compete Agreements Amendment Act of 2020 — the most aggressive prohibition against non-competition agreements in the country. When effective, the new law, which will apply to all employers with employees in the nation’s capital, will completely bar, with few exceptions, both post-employment covenants not to compete and non-competes that apply to current employees.

Under the District of Columbia’s unique home rule law, this legislation is likely to take effect after several subsequent steps occur. Its ultimate effective date may not be until October of this year, after the District’s annual budget is approved and takes effect.1

BACKGROUND

There has been a general trend in the past several years to restrain what many have considered as the overly aggressive use of post-employment non-competition agreements by some businesses to unnecessarily restrict employee movement. In response, a number of states have imposed limitations on their use:

  • Some states have banned the use of post-employment non-competes to restrict lower wage workers (e.g., IL, MD, ME, NH, VA) or nonexempt employees (e.g., MA, RI).
  • Other states have fashioned similar income or duties-based limits (OR, WA, ID).
  • Another group of states has created prerequisites for the imposition of enforceable non-competes, such as mandating pre-employment advance notice that a non-compete will be required (e.g., ME, MA, OR, WA).
  • California, North Dakota and Oklahoma have, with narrow exceptions, long forbidden post-employment non-competition agreements.
  • Most states statutorily forbid or limit non-competes with employees in specific industries or professions, often including broadcasters, physicians and attorneys.

However, in all cases at the state level at least, only post-employment non-competition covenants have been regulated, leaving employers free to forbid disloyal competitive activity by current employees. The new D.C. law bans this second kind of non-compete, as well as the first type.

THE D.C. LAWS PROHIBITIONS

In the likely event the D.C. law becomes effective, employers that operate in the District will not be permitted to “require or request” an employee to sign an agreement that contains a “non-competition provision.” The law declares that any non-competition provision contained in an employment agreement executed after the law’s effective date “shall be void as a matter of law and unenforceable.”

The breadth of the law’s prohibitions is illustrated by the wide scope of its definition of “non-competition provision.” A prohibited “non-competition provision“ is defined as “a provision of a written agreement between an employer and an employee that prohibits the employee from being simultaneously or subsequently employed by another person, performing work or providing services for pay for another person, or operating the employee’s own business.”

In addition to forbidding contractual terms, the law also will prohibit employers from maintaining policies “that prohibit[] an employee from: (1) [b]eing employed by another person; (2) [p]erforming work or providing services for pay for another person; or (3) [o]perating the employee’s own business.”

Thus, clearly within the ambit of the law’s prohibitions are commonly found contractual terms and employer policies that prevent an employee from simultaneously working for a competitor, and/or for any other employer, while they are employed with their primary employer.

While not explicit in the language of the D.C. law, by forbidding terms that prohibit employees from providing paid services to another person during their employment, it appears to make unlawful the standard clauses often used by businesses requiring employees to devote their full-time efforts to their position with and duties to that employer.

BAR AGAINST NON-COMPETES RESTRAINING CURRENT EMPLOYEES

Employers are likely to have concerns about being prevented from requiring current employees to refrain from competing with them during their employment, a common policy used by many businesses with good reason. The ban seemingly cuts against existing protections D.C. employers have under the common law duty of loyalty and fiduciary duties of officers and certain other employees.

The D.C. law will leave employers with few means for preventing acts of employee disloyalty, beyond merely responding to an act of disloyalty after the damage already has been inflicted. Where that disloyal act involves disclosure of a trade secret or other proprietary or confidential business information, any protection available to the employer necessarily would be incomplete: it is impossible to un-ring the proverbial bell. Once valuable information is disclosed, it cannot completely be recovered, making the damage permanent. By removing from the toolbox of employers an effective means of preventing disclosure to a competitor before it happens, the D.C. law will leave important interests of employers inadequately protected. In this regard, much may depend on any regulations that the Mayor may publish, as Section 104 of the law requires.

For example, at present, it is not clear whether the law will permit an employer to require a current employee to disclose the identity of other businesses for which the employee is providing services.2 Nor does the law address whether such an employer could contact a competitor for which its employee is working to warn it of consequences for using confidential information or trade secrets disclosed by that employee. These steps, along with the right to seek an injunction, would provide some measure of protection. However, until regulations are published and/or the law is interpreted by the courts, their availability is uncertain.

OTHER PROVISIONS OF THE LAW

Retaliation Prohibited. The D.C. law also contains broad anti-retaliation provisions. Under its provisions employers may not retaliate or threaten to retaliate against an employee for:

  • “The employee’s refusal to agree to a non-compete provision;”
  • “The employee’s alleged failure to comply with a non-compete provision or workplace policy made unlawful by [the law];”
  • “Requesting from the employer the information required to be provided to the employee;” or
  • “Asking, informing, or complaining about the existence, applicability, or validity of a non-compete provision or a workplace policy that the employee reasonably believes is prohibited under [the law] to (i) An employer; (ii) A coworker; (iii) The employee’s lawyer or agent; or (iv) A governmental entity.”

Notice to All Employees Required. All D.C. employers must provide written notice to their D.C. employees of the substance of the new law using the following language: “No employer operating in the District of Columbia may request or require any employee working in the District of Columbia to agree to a non-compete policy or agreement, in accordance with the Ban on Non-Compete Agreements Amendment Act of 2020.”

Such notice must be provided:

  • “Ninety calendar days after the applicability date of this title;”
  • “Seven calendar days after the individual becomes an employee of the employer; and”
  • “Fourteen calendar days after the employer receives a written request for such statement from the employee.”

Given the burden imposed by the strict timelines mandated for notice-giving under the law, it is easy to foresee a raft of unintentional violations of the notice provisions, each of which would subject the offending employer to liability for civil penalties (discussed below).

Record-Keeping Required. The Act requires the Mayor to issue rules to implement the Act, including rules requiring employers to keep and retain records relating to compliance with the Act. These rules have not yet been promulgated.

EMPLOYERS RETAIN SOME PROTECTIONS

Existing Agreements are Grandfathered. The D.C. law will apply prospectively only, so non-competition covenants that already are in place on the law’s effective date can be enforced if lawful under D.C.’s pre-existing common law standards.

Lawful Non-Disclosure Restrictions Remain Enforceable. The law expressly preserves the right of D.C. employers to protect “confidential, proprietary, or sensitive information, [a] client list, customer list, or a trade secret” if its non-disclosure restriction is “otherwise lawful.” As noted above, however, this ostensible protection will be incomplete if an employer cannot restrain its employees from working for competitors, as will be the case once the law becomes effective.

Exception for Sale of a Business Retained. Likewise, the law explicitly permits “[a]n otherwise lawful provision contained within or executed contemporaneously with an agreement between the seller of a business and one or more buyers of that business wherein the seller agrees not to compete with the buyer’s business.”

Narrow Exception Created for Medical Specialists.” The law permits providers of medical services to require non-competition clauses in employment agreements with physicians, but imposes advance notice and minimum salary conditions, among others.

Status of Non-Solicitation Agreements is Not Clear, but May be Unaffected. Oddly, while the law is very detailed in many respects, it makes no specific mention of agreements not to solicit customers and/or employees despite the importance and common usage of such terms by employers. Thus, it would appear that such agreements are not affected by the law and continue to be enforceable under existing common law standards. One may argue, though, that non-solicit agreements are simply a form of non-compete, and should be treated as such under the new D.C. law. Greater clarity is needed on this important question.

ENFORCEMENT AND REMEDIES

The law offers both administrative and judicial enforcement vehicles. Aggrieved employees can file suit and seek damages and attorney’s fees for violations of the law. In addition to damages and attorney’s fees, the law provides for assessment of civil penalties of between $500 to $3,000 per proven violation – including violations of notice and record-keeping requirements – in civil actions brought by employees.

Alternatively, complaints of violations may be filed with the Mayor, who, along with the Attorney General, is charged with enforcement authority. The Mayor is empowered to assess an administrative penalty of from $350 to $1,000 for each violation of the law, but for each violation of its anti-retaliation provisions the penalty assessed against an employer must be $1,000. Before being subject to an administrative penalty, the employer is entitled to notice and an opportunity for a formal hearing.

WHAT NOW?

D.C. Employers. Prudent employers in the District must assume that the D.C. law banning non-competition agreements will become effective in the near future and should begin the process of modifying employment agreements and policies for future use. Fortunately, as long as non-solicitation agreements are deemed permissible under the law, tools remain to protect most legitimate business interests. A combination of carefully crafted non-disclosure (NDA) and non-solicitation agreements safeguarding an employer’s customers and employees should offer a good measure of protection for its goodwill and proprietary information from illicit disclosure and use by current and former employees.

Employers may be justified in arguing that only a non-compete effectively mitigates the prospect that a former employee, or a current employee planning to leave, and a grasping competitor will conspire to steal its proprietary information, customer goodwill and employees, and that NDAs and non-solicits protect them only after information or customers already have been stolen. However, the D.C. Council and legislatures of three states have made a policy decision that the cost to employees and the public outweighs the interest of employers.

All U.S. Employers. It appears that it is not only D.C. employers who must be on high alert for the imminent demise of post-employment non-compete restrictions on employees who are newly hired or execute new employment agreements. All employers nationwide should brace themselves for a re-energized campaign at the federal level, led by President Biden, to curb, if not extinguish, the use of post-employment non-competition agreements in the employment setting.

In its waning days, the Obama White House published a “call to action” urging state legislatures to curb the use of non-competes at the state level, arguing that such restrictions suppressed wages. At around the same time, the Federal Trade Commission (FTC) and Antitrust Division of the Justice Department released guidance for human resources professionals on recognizing collusive wage practices among employers and promising to act against such collusion. While some states responded by enacting laws to restrict non-competes (discussed above), during his campaign President Biden made the elimination of most non-competition agreements by the federal government a policy goal of his administration.

Even during the Trump Administration, the FTC conducted public workshops to examine whether there is a sufficient legal basis and empirical economic support to promulgate a Commission Rule that would restrict the use of non-compete clauses in employment contracts. In addition, the Justice Department filed a number of antitrust actions against employers, including several Silicon Valley giants, that entered into no-poaching agreements

In addition to action taken and promised by the executive branch, The Workforce Mobility Act was first introduced in both houses of Congress in 2018 to ban most employee non-compete agreements. It was reintroduced in 2019 as S. 2614 and H.R. 5710, both of which had bi-partisan sponsorship. Hearings were held in the Senate, but the bill failed to advance. Separately, Sen. Marco Rubio introduced his own bill in 2019, the Freedom to Compete Act, to limit the application of non-competes to exempt employees under the Fair Labor Standards Act, but no formal action was taken. New federal legislation is expected to be introduced during this Congressional session.

CONCLUSION

In sum, the new D.C. law is probably indicative of a wave of even broader restrictions in the near future. Whether in the form of forthcoming administrative or legislative action, it seems likely that non-competition agreements may be subjected to federal regulation and perhaps largely banned or severely restricted nationwide.

While employers will have to adjust to this new reality should it come to pass, a combination of well drafted non-disclosure and non-solicitation policies should offer necessary protection for legitimate business interests.

Moreover, national and multi-state employers may actually welcome a federal solution to replace the existing patchwork of state common law and statutory rules that govern restrictive covenants. Although federal rules would not entirely eliminate differences from state to state as the D.C. Council’s recent action in banning restrictions on current employees illustrates, they would at least reduce the complexity of this area of law.

1 First, there is a 30-day Congressional review period after the law’s transmittal to Congress, during which Congress can object by joint resolution and which President Biden would then need to sign to keep the law from taking effect. Given the President’s outspoken opposition to non-competition agreements, even if Congress unexpectedly were to formally object to the law, it is highly unlikely that the President would agree to that objection. The ban on non-competes, therefore, seems virtually certain to become effective this year, likely upon the effective date of the District’s approved annual budget, which could occur as late as October 1, 2021. (D.C. law requires that for a new law to become effective, its fiscal effects must be presented when the annual budget is considered by the D.C. Council).

2 If an employer is to exercise the right to protect its confidential business information through lawful means, as the law provides (see below), such disclosure would be essential.

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