The White House challenges states to reform non-compete agreements

This week, the White House announced a call to action to reform non-compete agreements [pdf]. Instead of proposing sweeping federal legislation, it is asking each state to pass non-compete reforms. This call to action comes on the heels of a joint White House/Treasury Department report [pdf] issued this past spring addressing the use, issues, and state responses to non-competition agreements.

Why is the White House taking on this issue? According to its Fact Sheet, non-compete agreements narrow the employment options for an estimated one in five workers in the United States, which the White House believes has the real potential to slow job growth and increase unemployment.

As a result, the White House is calling on state policymakers to pursue best-practice policy objectives, including one or more of the following objectives:

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 those who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause. 
2. 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 2 encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work. 
3. 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.

I am encouraged by this White House initiative. First, consider that a White House that favors big government via federal agencies legislating instead of administering is not proposing federal non-compete reforms, but is instead calling on individual states to take on this issue on a state-by-state basis.

Secondly, there is no doubt that employers overuse non-competes. Employers often mis-uses non-competes to try to scare every worker away from their competitors, knowing that the shear cost of litigation often serves to enforce an otherwise unenforceable agreement. Of course, costs flow both ways, and while a business may be better positioned to bear that burden, do you really need to spend money fighting a fight that, at the end of the day, you likely cannot win? Pragmatically, then, across-the-board non-competes for all employees do not make sense for employers.

There is no reason to chain employees with overly broad agreements. Employers often use the destructive tornado of noncompete agreements to blow out a match-flame of competition. Instead, employers should target the specific issues of concern, such as trade secrets protections, non-solicitation, and non-disclosure of confidential information, and narrow the agreement only to address those concerns. The more narrow an agreement, the more likely it will be that an already skeptical judge (and judges typically do not like non-competes) will enforce it.

In the right circumstances, non-compete agreements play a key role in protecting businesses and promoting innovation. Employers need to understand, however, that every employee will not destroy your business by leaving to work for a competitor. Your job in developing and deploying post-employment covenants is determining the specific interests you need to protect, and tailoring your agreement to that specific interest on an employee-by-employee, or job-class-by-job-class basis.