Obama Administration Issues “Call of Action” to States to Curtail Non-Compete Agreements

On October 25, 2016, the Obama Administration released a “call to action” urging state policymakers to adopt best practices and enact reforms that aim to reduce the prevalence of non-compete agreements (i.e. restrictive covenants) in the employment context.  While not legally binding or controlling in any way, the “call to action” may signal a continuing shift towards disfavoring non-competes or additional states banning them altogether.

Non-compete agreements are contracts under which an employee generally agrees not to enter into or start a similar profession or trade in competition against the employer.  One of the principal reasons for enforcing a non-compete agreement is to prevent dissemination of trade secrets or other sensitive information and unfair competition.  Because of these legitimate concerns, many employers require their employees to sign such contracts as a condition of employment to protect themselves.

The Obama Administration believes that non-compete agreements have the potential to hold back wages and entrepreneurship, that most workers in America should not be covered by a non-compete agreement, and that there is a “gross overuse of non-compete clauses today.”

Recognizing that non-compete agreements are currently only banned in three states (California, Oklahoma, and North Dakota), the Obama Administration is calling on state policymakers to enact legislation reflecting “best-practice policy objectives,” including:

  1. Ban 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
  • workers who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause.
  1. Improve 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 (because an applicant who has accepted an offer and declined other positions may have less bargaining power);
  • providing consideration over and above continued employment for workers who sign non-compete agreements; or
  • encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work.
  1. Incentivize employers to write enforceable contracts, and encourage 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.

The Obama Administration also called for states to assign appropriate remedies or penalties for employers that do not comply with state non-compete statutes.

Practically speaking, this call to action is not an enforceable law that affects any non-compete agreements currently in use.  Wisconsin law, and especially some recent decisions, already disfavor non-compete contracts and require such agreements to withstand scrutiny.

Under Wisconsin law, to be enforceable, a non-compete agreement must: (1) be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive as to the employee; and (5) not be contrary to public policy.

While non-compete agreements are still enforceable in Wisconsin if they satisfy the above standards, there have been recent decisions of Wisconsin appellate courts that have indicated a trend towards additional scrutiny and narrowing interpretations of non-compete agreements. See a prior blog post on the subject.

Only time will tell if this “call to action” leads to any tangible changes in Wisconsin legislation or in how Wisconsin courts treat non-compete agreements, but employers need to be aware of the growing disfavor of such contracts and should consider the specific reasons that a non-compete is essential to the protection of their businesses.  Given the growing trend towards disfavoring such agreements, they should be narrowly tailored to achieve the legitimate goal to ensure they are more likely to be found enforceable by a court.

Given the trend is still relatively recent, we recommend having an attorney review your existing non-compete agreements, especially those entered several years prior, to ensure that they would be enforceable in light of recent developments.

If you have questions about this article, please contact an attorney at Mallery & Zimmerman.