Tuesday, March 8, 2022

The time has come to limit the overuse and overbreadth of noncompetition agreements

It's been nearly five years since I asked this question: "Is your non-compete agreement killing a fly with a sledgehammer?" Now it seems that the federal government is asking the same question.

Yesterday, the Treasury Department published its report, "The State of Labor Market Competition" (as reported by The New York Times). The report sought to answer to investigate the effects of a lack of labor market competition on our country's labor market and answer whether that lack of competition hurts labor markets.

One of the key issues the report addresses is the impact of the overuse of noncompetitive agreements and other post-employment restrictive covenants. The report calls for laws or regulations to limit the use and impact of these agreements.

Employers, you don't have to wait for the government to act for your business to limit how you are using non-compete agreements, which too many of you are using way too broadly. Legally speaking, to be enforceable such an agreement must be narrowly tailored to the legitimate business interest you are trying to protect. Yet, all too often employers require many too many employees to sign overly broad and restrictive non-compete agreements. It's a bullying scare tactic. It's also legally unsupportable. Instead, you should be limiting the agreement's reach to the bona fide concerns you are trying to address. 

I suggest a tiered approach to your post-employment restrictive covenants:
  • Tier 1: Are you worried about protecting confidential information? In that case, maybe a non-disclosure agreement is all you need.
  • Tier 2: Are you worried about an employee poaching your customers, employees, or vendors? Then a non-solicit is in order (plus the non-disclosure).
  • Tier 3: Is what an employee provides so unique in nature that you genuinely will be irreparably harmed by the employee jumping to a competitor? Then, and only then, is a broad non-competition agreement called for (plus the non-disclosure and non-solicit).
Use some discretion and common sense. Narrowly tailor your restrictive-covenant agreements to the specific interest(s) you are trying to protect. And, if you don't have such an interest, forego the agreement altogether for that employee or group of employees. Otherwise, you will spend oodles of money attempting to enforce an unenforceable agreement. While that strategy is great for me, it's terrible for your business, which should be in the business of making money, not throwing it away chasing a fool's errand.