[co-authors: Kennard Davis* and Dillon Williams**]

The landscape is changing in the realm of restrictive covenants such as non-compete and non-solicitation agreements. Several new laws limit the use and scope of restrictive covenants, one of which was recently enacted in Washington, D.C. Employers will now have to navigate these additional obstacles in its practices.

Courts scrutinize restrictive covenants

For many years, some courts have scrutinized non-compete agreements by calling into question the viability of such agreements, finding them unenforceable as overbroad, vague, or otherwise invalid. This disfavored treatment of non-competes is growing among the courts and is also creating a negative effect on the protection of trade secrets. This is especially significant considering the legal standard for protecting work secrets is also evolving as more employees are increasingly working remotely.

Limiting restrictive covenants

In addition to this judicial trend, it is also a recent legislative priority to limit or ban the use of restrictive covenants. In 2021, President Biden signed an executive order encouraging the Federal Trade Commission (FTC) to employ its statutory rulemaking authority "to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility." As a result, the FTC, and the Department of Justice (DOJ) Anti-trust Division recently partnered with the National Labor Relations Board to address key issues such as the regulation of non-competes. The DOJ and other federal anti-trust agencies are increasingly paying attention to employer-employee non-compete agreements to determine whether the agreements are enforceable.

Legislative restraints

In the year since President Biden signed the executive order, numerous states have enacted or amended statutes limiting or banning non-compete agreements. For example, Washington, D.C. recently changed its non-compete laws for all employers with D.C. employees. D.C. Law 23-209. Ban on Non-Compete Agreements Amendment Act of 2020. Effective on October 1, 2022, the newly amended law bans non-compete agreements for employees below a certain financial threshold, permitting only non-compete agreements for “highly compensated employees.” Id. It allows employers to bar their employees from disclosing, using, selling, or accessing the employer's confidential and proprietary information during or after employment.

A couple of months before the new D.C. law went into effect, U.S. Representative Mike Garcia introduced a bill titled the Restoring Workers' Rights Act (RWRA), which, if codified, will amend the Fair Labor Standards Act (FLSA) to ban non-compete agreements nationwide for employees considered non-exempt under the FLSA. The act seeks to prohibit employers from restricting employees from:

1. Doing any work for another employer for a specified period of time;
2. Performing any work in a specified geographical area; or
3. Doing any work for another employer that is similar to the work performed by the employee for that employer.

This legislation, if passed, will effectively create a federal ban on non-compete agreements for a substantial portion of the workforce.

Tips for employers

Consider the following best practices when drafting non-compete and non-solicitation agreements, particularly as employers review those that apply to remote workers:

1. Keep the restrictions reasonable and narrow;

a. Limit the scope of the restrictions;
b. Limit the geographical scope of the restrictions; and
c. Limit the duration of the restrictions.

2. Be aware of the current applicable law of the state where your employee will reside while working for the company;

a. There is a likelihood if the non-compete agreement includes a forum selection clause or choice of law provision that provides another state’s law governs any disputes related to the agreement, the presiding state’s public policy may render the agreement void and unenforceable.

3. Include specific provision(s) solely aimed at protecting the company’s confidential information and trade secrets.

a. Consider including the following federal laws in specific provisions of the agreement to assist in protecting the company’s confidential information and trade secrets: 1) the Defend Trade Secrets Act (18 U.S.C. § 1836); 2) the Computer Fraud and Abuse Act (18 U.S.C. § 1030); and 3) the Stored Communications Act (18 U.S.C. § 2701).

Conclusion

Considering the change in the landscape of restrictive covenants, employers should be proactive and speak to an attorney before disseminating the company’s current non-compete and non- solicitation agreement. Using such agreements will be more challenging than ever, as companies must consider changing, or additional, federal and state-specific regulations, along with the fact that their employees are increasingly working remotely. These changes in the legal landscape of non-compete and non-solicitation agreements could render a company’s current agreement unenforceable. Therefore, employers must now apply new, additional best practices to effectively manage their growing remote workforce and protect their business.

* Baker Donelson

** Rasmussen Dickey Moore (“RDM”)