In last week’s In-House Connect webinar titled “Restrictive Covenants and the FTC’s Non-Compete Rule,” Wilson Sonsini Partners Jess Krannich, Maureen Ohlhausen, and Marina Tsatalis shed light on the evolving trends and legal landscape surrounding non-compete agreements. Their discussion provided invaluable insights for in-house legal teams grappling with the complexities of these agreements.
Here are the five key takeaways from the session:
- Courts’ Reluctance to Enforce Overbroad Non-Competes
Judicial systems are increasingly disfavoring overly restrictive non-compete clauses, prioritizing employee mobility over broad limitations. For instance, Delaware courts are setting a strong precedent by striking down excessively restrictive clauses rather than modifying them. This shift reflects a growing judicial reluctance to support employers that impose unreasonable barriers to competition.
- State-by-State Variations in Enforceability
The enforceability of non-compete agreements varies dramatically across states, with some offering more leniency than others.
For example:
- Wyoming and Nebraska outright reject modifying overbroad non-competes (known as blue penciling), while Arkansas requires modification of overly broad agreements.
- Utah enforces non-competes with a strict one-year limitation for agreements signed after 2016.
- California generally prohibits non-compete agreements, with limited exceptions.
These state-specific differences underscore the importance of understanding local laws when drafting and enforcing non-compete agreements.
- Rising Legislative Codification
There is a growing trend toward formalized legislation around non-competes. Washington, D.C. has introduced a ban on non-compete agreements for lower-level employees based on salary thresholds. Nationally, four states have implemented outright bans, while 12 states have introduced major restrictions. Meanwhile, 35 states are employing a sliding scale approach to non-compete enforcement, further complicating the legal landscape for businesses.
- The FTC’s Proposed Nationwide Ban
The Federal Trade Commission (FTC) is advocating for a sweeping national ban on non-compete agreements. If implemented, this proposal could nullify existing non-compete agreements and apply stricter oversight on future ones. Although currently under legal challenge and not yet enforced, the FTC’s initiative has already heightened scrutiny and resistance to the use of non-competes, forcing many companies to rethink their reliance on these agreements.
- Strategic Drafting and Enforcement of Non-Competes
To minimize risks, companies should focus on crafting state-compliant, narrowly tailored non-compete agreements.
This includes:
- Considering state-specific addenda that address varying local laws.
- Implementing robust security protocols to protect trade secrets.
- Limiting the geographical and durational scope of agreements to enhance enforceability.
By adopting these strategic practices, companies can reduce the likelihood of legal challenges and increase the enforceability of their non-compete clauses.
Staying Ahead of the Non-Compete Landscape
The webinar underscored the importance of vigilance and adaptability for in-house counsel as the regulatory environment around non-competes continues to evolve. By staying informed about judicial trends, state-specific laws, and potential federal changes, legal teams can navigate the complexities of non-competes more effectively. Ongoing education and consultation with seasoned legal professionals will be critical in ensuring compliance and safeguarding business interests in this rapidly shifting landscape.
Missed The Webinar? You can watch it now via IHC On-Demand!
