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Overall, companies should closely monitor the evolving views of courts on restrictive employment contracts and ensure that their own agreements – and enforcement expectations – reflect this changing landscape. Non-compete obligations are not the only agreements that have been called into question in recent litigation. For three decades, California law has allowed companies to enforce non-solicitation agreements carefully designed for employees. But in May 2019, in WeRide Corp., et al v. Kun Huang, et al., the Northern District of California ruled that such agreements were void because they constituted an invalid restriction on employment. Two previous cases in California had yielded similar results, but they concerned the recruitment sector; WeRide did not. “A 35-year-old precedent was a bit upset,” Gies says. Where an employer is located and the employee is working, this has an impact on the performance of non-compete obligations. Fact. Non-compete obligations are interpreted in accordance with state law, and the law varies from state to state. Some states, such as California, consider non-compete obligations to be contrary to their public policy and refuse to enforce them except in certain circumstances. Other states, including Missouri and Illinois, give employers much greater protection.
Many agreements contain a “choice of law provision” for clarity. Ms. Rigney is a partner in the Raleigh office and focuses on workplace safety, employment and safety in her practice. The frequency of non-compete obligations varies across the country. Table 2 shows the percentage of establishments that use non-compete clauses in each of the 12 largest countries in terms of population.9 A remarkable result is that non-compete obligations are widespread nationwide, with more than 40% of establishments in each of the 12 largest states having at least a few employees covered by non-compete obligations. This includes 45.1% of transactions in California, although non-compete obligations are unenforceable under California state law.10 While these agreements would not hold water if challenged in California courts, companies can still use them to pressure employees not to work for competitors. Most non-compete obligations are never brought before the courts: employees assume they are valid or workers cannot afford the risks and costs of a potential legal dispute. A typical employee who is reminded that he or she has signed a non-compete agreement or who receives an intimidating letter from the employer`s legal counsel may simply accept that working for a competitor is not an option instead of running the risk of being sued.
This has a deterrent effect since workers remain in their workplaces, regardless of the actual applicability of their non-compete agreements.11 These decisions have been widely welcomed by the industry, which sees arbitration as a way to reduce litigation costs. “But there is significant opposition in other circles, including several state legislators, plaintiffs` lawyers, and various interest groups,” says Tom Gies of Crowell & Moring. The #MeToo movement has drawn public attention to the issue by arguing that private arbitration can conceal allegations of sexual misconduct. Several states, including California, New York and New Jersey, have passed laws over the past two years that largely restrict the use of mandatory arbitration and prohibit the use of confidentiality provisions in settlement agreements. Last September, the U.S. House of Representatives passed the Forced Arbitration Injustice Repeal Act (FAIR), which prohibits companies from requiring employees to seek private arbitration. Under most state laws, non-compete obligations for employees must be proportionate over time, relative to geographic area (the area in which the employee is restricted) and scope (the type of work the employee is not allowed to perform during the restricted period). States adopt one of three general approaches to excessively broad non-compete obligations: (1) judicial amendment in which the tribunal revises the agreement to the extent permitted; (2) “blue pencil”, in which the court simply pierces the offensive language and leaves the rest of the language enforceable or not; and (3) the “red pencil”, in which the court annulls any overly broad restrictions and renders this provision unenforceable. The first approach encourages employers to formulate restrictions that are too broad, while the last two advocate strict restrictions to avoid the risk of the agreement being declared invalid.
The magnitude of the non-compete obligations we see in this survey is significantly higher than what a study on workers in 2014 found: 18.1% of employees. The difference is probably due to the fact that the investigations were spaced three years apart, suggesting that the use of non-compete obligations is increasing. This is probably also due to the fact that our survey was a survey of companies, whereas the previous survey was a survey of workers in the private sector or a public health system. While companies know if their employees are subject to non-compete obligations, employees may not know or remember that they are covered by a non-compete obligation and therefore cannot declare that they are subject to it. 9. We only report the non-compete rate for the 12 largest population states to ensure that we have a sufficient number of observations per state to provide reliable estimates: each of these states had at least 25 observations in the sample. Although the survey was national, smaller states had fewer observations per state. These tensions are likely to lead to more arbitration-focused litigation – and companies should review their agreements. “The law was moving at the speed of light,” Gies says. “A lot of agreements that were well crafted a few years ago probably won`t get you where you need to be.” If you are considering restrictive agreements in agreements with competitors in the labour market (e.g. B from other employers), you should consider the following: Many companies have adopted a more aggressive use of non-compete obligations and other restrictive post-employment agreements in recent years. But the increased use of such agreements has led to more litigation, and a number of courts are reporting that they are less and less willing to enforce them.
The results of our survey show that between 27.8% and 46.5% of private sector workers – between 36 and 60 million workers – are subject to non-compete obligations. .
