Mintz on Air: Practical Policies - Non-Competes: Are They Still a Thing?

In the latest episode of the Mintz on Air: Practical Policies Podcast, Member Jen Rubin hosts a conversation on the status and enforceability of non-compete agreements. This episode is part of a series of conversations designed to help employers navigate workplace changes under the Trump administration.

Jen is joined by Member Brendan Lowd, to discuss:

1. What non-compete agreements are and how they compare to non-solicits and NDAs
2. The FTC’s attempt to regulate non-competes and the impact of legal challenges
3. How states like California and Massachusetts are shaping non-compete laws
4. Challenges for multi-jurisdictional employers and best practices for compliance
5. The future of non-competes

Listen to gain insights on how businesses can approach non-compete agreements in a changing legal and regulatory environment.

Non-Competes: Are They Still a Thing? - Transcript

Jen Rubin (JR): Welcome to Mintz on Air, the Practical Policies podcast. Today's topic is Non-Competes: Are they still a thing? I'm Jen Rubin, a Member of the Mintz Employment Group with the San Diego based Bicoastal Employment Practice representing management executives and corporate boards. Thank you for joining our Mintz on Air podcast, and I hope you’ve had the opportunity to tune in to our programs previously.

If you have, you know that my guests and I have been discussing a variety of employment related topics and developments. If you have not heard our previous podcast and would like to access our content, please visit our Insights page at Mintz.com.

Today, I'm joined by my partner Brendan Lowd, who is also an employment lawyer but who is based in our Boston office. Brendan divides his time between employment litigation, such as restrictive covenant cases, class action wage and hour claims, and advising corporate legal teams and human resources personnel about those thorny employment issues, including non-competes. Brendan also practices in the merger and acquisition space, where he advises clients on all aspects of businesses that are bought and sold, including restrictive covenant issues associated with those transactions.

Greetings, Brendan, and thanks for joining Mintz on Air.

Brendan Lowd (BL): Thanks, Jen. Looking forward to this robust conversation we're going to have about non-competes.

What is a Non-Compete Agreement?

JR: Today's topic is Non-Competes: Are they still a thing? So, Brendan, I want to start out by asking you a very basic question. What is a non-compete agreement?

BL: Well, I struggle with the basic questions, but I think this one is a good one because clients always ask or they use terms like non-compete and non-solicit, and sometimes there's not total unity in terms of what we're talking about. I like to start these issues by setting the table quite clearly. We're talking about employees and employers. For a non-compete, that is a provision in the agreement between an employee and employer, which prohibits the employee from working for a competitor.

The competitor usually is defined in some contexts, either quite broadly or quite narrowly. The other two real components of this, which I know we'll touch upon because it's hard to talk about non-competes without talking about these two other agreements are a non-solicitation agreement and an NDA or confidentiality agreement. So, whereas a non-compete prohibits an employee from working for a competing employer, a non-solicit doesn't prohibit an employee from working for a competing employer. But what it does typically prohibit is one or two things. One the employee cannot solicit customers or clients of their previous employer.

And two, the employee cannot raid or otherwise encourage or solicit employees from their previous employer to leave their employment and then join the employee at the new employer. The non-solicit has these two components; an employee non-solicit and then the customer client non-solicit. The last agreement that I think is often always discussed in these types of issues is a non-disclosure confidentiality agreement which prohibits the employer from taking confidential information and trade secrets from the previous employer.

These are sometimes the most closely held secrets of the employer, and then people like you and I go into court and fight over other things that may be confidential. The client list or things of that nature which on their face may not be confidential, you think isn’t confidential, but then you get into discussions about how much time, effort, and expense is put into that information, and we have debate over what's confidential.

That's how I try to look at these issues in those three buckets; non-compete, non-solicit, and an NDA.

The FTC and Federal Regulations on Non-Competes

JR: That's very helpful because to me each of those things is telling somebody what you cannot do. It's a contract saying here's what you cannot do either during employment or after employment but we've got this contract. That’s kind of a generic and specific way of looking at it but let me ask you this question: Contracts are generally creatures of state law. Last year, the Federal Trade Commission, which is the federal agency responsible for enforcing antitrust laws and generally protecting consumers, dipped its toe into regulating non-competes. So, I'd like to divert for a moment and ask you to tell us generally what happened with the FTC and non-competes, and what is the status of that?

BL: Well, first panic, right, that happened by everybody because this was a seismic shift. You point out correctly that this is a federal issue. The FTC or it was a federal ban on non-competes, which was supposed to take effect last fall, and it essentially banned all non-competes between employees and employers, with a couple narrow exceptions. One, sale of a business context and two, if there were certain senior executives, that had preexisting non-competes, they could stay in effect.

But anything after the date the FTC rule was to go into effect would be prohibited, even with senior executives. So that's a huge deal that wasn't in existence before. When things like this happen, especially on a federal level, there are a lot of court challenges by various trade groups and other individuals. And that's what happened here, is that there were court challenges.

As of today, this rule is not enforceable, and it was never enforced due to the court cases last fall. And then the question becomes, you know, we also had this other thing last fall around November. Jen, if you remember, I think we had an election, and a different political party now holds the Oval Office. So that's obviously going to play a role in what happens with all federal agencies including the FTC.

JR: Any predictions on whether you see this new administration giving direction to the FTC to pursue imposing this regulation through the courts?

BL: The lawyer caveat we're used to giving is who really knows? But I'll tell you about my opinion on this and tell me if you disagree. I don't think this is going to see the light of day. I think if you go back to the previous Trump administration and the Supreme Court justices he appointed, they were all pretty in favor of contractual rights with parties.

There was a decision about arbitration agreements, which is another form of employee contract that is often challenged by employees for arguments that they're under duress or they don't get something for the arbitration agreement consideration.. But that Supreme Court, with Trump's appointments, held up the ability for the employer entering into these types of contracts.

So, with those types of justices in the background of any court challenge and just what I think the Trump administration is probably going to do on this issue overall, I don't see the FTC having a realistic chance of coming back alive and being a focal point of the administration. But, as I said, there's always a lawyer caveat that maybe something happens or changes, but I wouldn't be up at night thinking that the FTC is around the corner.

State Laws and the Patchwork of Non-Compete Regulations

JR: I do agree with that. But I do think that we have something to discuss about the states. And of course, for everybody out there who is not a lawyer, we do have two systems in this country. We have a federal system which comes with laws and actions out of Washington, DC, and then, each of the several states that enact their own laws and regulations that are applicable to the states.

Regardless of what happens at the federal level with respect to non-compete agreements, and again, using that term very broadly to include restrictive covenants, not to compete after employment, and not solicitation agreements, what do you think, Brendan, in terms of the states? And another caveat before I let you answer, because I am California employment lawyer, California doubled down on its ban on non-competes.

And for those of you who are not familiar with that, see our Valentine's Day post from last year from the Mintz Employment Group. California is a state where you have to tread very carefully, if at all, into the realm of non-compete agreements and even non-solicitation agreements. But, Brandon, tell us a little bit about, for example, Massachusetts and what that approach has been like, and I'd love to hear your opinions about what you think is going to be happening in other states in this regard.

BL: Well, a couple of things, Jen. One, you're more than a California lawyer. We all know you are a Connecticut and New York lawyer, so you're bicoastal. I have to clarify that right off the bat. The second point is this whole issue, at least for me, working with clients, this is why we get paid the big bucks. This is why we do this because this state law component of this is so complicated, because each state is looking at this very differently. To your point, California for years had the non-compete ban in effect.

A lot of these states are trying to, at some level, catch up or be in the same stratosphere as how California looks at this. And Massachusetts was one of those states. I still call it the new non-compete law, but it's not that new, Jen. It was October 1, 2018, which is when that law went into effect and this was a very big change for us, Bostonian and other Commonwealth lawyers in terms of these non-compete cases that we have, because prior to this law, it was the old school common law, which was: there's a contract. Is there some protectable interest? Is there something serious at issue here? Did somebody take information they shouldn't? Were clients developed with significant training by the employer, and dedicated time by the employer to the employee to protect in the context of non-solicit relationships with customers? All that discussion took place in court papers and in conversations with judges.

But with this new law, it's more robotic because there are certain requirements that flat out must be met for a non-compete to be enforceable. And in this context, I truly am talking about a non-compete, because the law expressly excludes those employee and customer non-solicits we were talking about earlier. For the non-compete, there must be a few absolute must-haves in this contract.

One, the employee must have a right to seek their own counsel. There’s got to be a statement in the non-compete that says that. If it doesn't say that you're going to have a big problem with enforcement and you can't slam it down an employee’s throat, you have to give them at least ten business days to look at it if you're an existing employee.

If you're a new employee, it's got to come with the offer letter. You can't have it sneak in later, and the real big thing for the non-compete is this consideration idea that us lawyers discuss all the time with our clients, courts, and adversaries. The Massachusetts non-compete, what this means is to even have the non-compete to be enforceable, you must have a garden leave provision.

JR: What is that?

BL: When I say must, there may be other ways to do it based on the statute of the language. But I would tell you, at least us practitioners here in Massachusetts, we stick to the statute and the statute is clear in that you can have a garden leave provision to enforce the non-compete. And what that means is you've got to pay the employee to sit on the sideline.

If there's a non-compete period in the statute another restriction is you're limited to 12 months post-employment, so you can't have an 18–24-month employee non-compete. You're capped at 12 months, and if you terminate the employee without cause, you can't have any non-compete under the statute on its face because the statute makes clear non-competes are enforceable if the employee leaves or if the employee is terminated for cause.

Even then, during the restricted period, you still must pay the employee to sit on the sideline. And that pay is 50% of the employee's salary, so, a lot of employers are saying, “Hey, I don't know about this,” Jen. “I must have these complicated agreements that have to have certain things. So now I have this long ten-page agreement that Brendon and others at Mintz told me I need to do. Plus, I may not be able to enforce it if I terminate the employee without cause. You know, it's just another agreement to maybe have that non-compete be revived. And then even after all of that, I have to pay for the employee to sit on the sideline?” It's been a very big change over the last handful of years here, given this statute and Massachusetts isn't alone.

I think Massachusetts is comprehensive in this respect. Other states, like the one right next to us, Rhode Island, have some non-compete restrictions, but they're more tied to low-wage workers or nonexempt employees, those that are entitled to overtime. These types of employees you can't have a non-compete with. So, all these states are really looking at this, and I don't know about you, but I think it's getting to a point where for us litigators, it's hard to stand in front of judges and try to have an employee put out on the sideline or prohibit the employee from making a living.

Now, in some circumstances, high-level executives, sale of a business, I think courts are more likely to say, “Hey, wait a second, there's something really legitimate here that should be protected. There was significant consideration, cash paid, and a change in control. Or it's a senior executive. They have access to all this information, the secret sauce of the company, that they should be prohibited.” In Massachusetts, if they're going to be paid to sit on the sideline, a judge is going to be more likely to greenlight such a non-compete.

But if you don't have some of those facts and you're trying to, from a court's perspective, stifle competition, which is what the whole FTC rule is supposed to generate, competition among all employees. So, if you're viewed by a judge trying to stifle competition, that can be what we call a hot bench. You can get a lot of questions that do not always lead to enforcement of the non-compete.

Navigating Non-Competes for Multi-Jurisdictional Employers

JR: Well, it's a great segway because competition and free competition and shifting gears from the FTC and the federal rule, which would presumably apply to all 50 states if it ever goes into effect, but then you have the various 50 states. I'm sure you've noticed, Brendan, as I have now, people move around all the time. You have an employee who starts in, let's say, Massachusetts and moves to California. An employee who starts in Utah moves to Texas, whatever it may be. Where our distributed workforce is going is a lot of mobility throughout the several states. Any advice that you can give for multi-jurisdictional employers who want to put in place non-compete agreements for good reasons, and they feel that it's important to protect their important company information or data or trade secrets or whatever it may be, but they're dealing with the workforce that's moving all over the place? What's an employer to do?

BL: This is complicated to say the least, because I think it is downright impractical and probably impossible at this stage to have some non-compete that complies with the 50 states. I don't know how you can do it. I've never really seen it done well and when it is done, you have all these complicated addendums that get attached, and I just think it makes a mess of it.

It also looks like overreach sometimes because I'm always viewing this as how is the court going to view this and how is the court going to look at this? It's going to be something that's reasonable. To that point, I think the advice on these multi-jurisdictional questions is you must take, if you're an employer, a real hard look at your employee workforce.

Do we need to have non-competes for the so-called rank and file or is it just some sales folks that were really concerned about customers and clients because they're entrenched with our client base as the employer? We don't want them going over to a competitor across the street. For those folks, I think if you have a real close look, it becomes a little bit easier in that maybe you have a non-compete for only a handful of states, because this is where the sales team is or maybe you have a non-compete in a few states because this is where the top executives are.

At this point, I think if you're very narrow and if you're very surgical in how you're looking at your non-competes, you can do it in a way that makes sense for the organization and has the byproduct of looking good when you're trying to enforce the non-compete.

It's a two-step tango. One, you must have an enforceable non-compete, which has to get signed and two, you have to get a court to enforce it. If you go in front of a judge and the other side says, “Well, look, every one of the 600 employees at the company is signing a non-compete.” that doesn't look as good as, “We are only having the non-compete signed by our sales staff that has access to all the critical information in the company, or only our high-level executives are signing a non-compete.” I think that's a pretty good fact to have and a sensible, business-minded solution to an evolving problem, i.e. state by state non-competes.

Are Non-Competes Still a Thing?

JR: Let me ask you kind of this final question, which really gets at the nub of non-competes: are they still a thing, which is the title of our podcast today. Are non-competes even necessary or relevant anymore? Are they still a thing?

BL: We've talked about everything regarding employees, employers, and non-competes. So, as every good lawyer does, I'm going to deflect on the topic for a second and go back. In a sale of a business it can be by an executive, someone who owns 100% of the company. So, they're an owner, but they're also an employee and when they sell the company, they may only be an employee going forward. In that context, sale of a business non-compete, I don't think that's going out of style.

JR: Even California would support that.

BL: Exactly. That's not that's not going out of style. If the California courts are enforcing it then you have a pretty good shot in some of the other jurisdictions that you and I practice in. So that's point one. Point two, as each day goes by, I have these conversations with clients, and I'm sure you do with your East Coast clients, it's like, do we really need this? I'm seeing more and more agreements without non-competes, certainly in Massachusetts because they don't want to do the garden leave, the employers. And I can't say I blame them. And what are you really trying to protect? If you have a salesperson and they are trying to go to a competing company, but that salesperson can't touch or contact any of the company's customers or clients, even ones that they worked with, or recruit from the employer they just left, I think you're protected with what we've talked, known as a non-solicit in that context.

You don't have to have any garden leave in Massachusetts to have those enforced. I think you also look a little reasonable. Now that's not without risk. The other side can get up and say, well look, the way that the company is looking to enforce this is it essentially operates like a non-compete. I still think you have to be strategic with how you draft your non-solicits to make sure that they are constructed in a way that supports your business interests so, you could present a pretty convincing case to a court that should be enforceable. But as time goes on, I'm seeing less and less non-competes on the employee space, certainly less and less on the rank and file, maybe on the high-level executives, maybe on the salespeople I can be convinced, or a client and I can work together and collaboratively to say, okay, this makes sense in this context, maybe not in that context.

From five, ten years ago I'm seeing and quite frankly advising on much less non-competes being entered into by employers. The one caveat I'll say is sometimes this isn't the most rational decision that gets made.

If an employer sees their competitors are doing a non-compete and they keep doing it, and then, you know, they have some issue where they hire somebody, and you get a cease and desist letter from a lawyer saying to our client that they've hired someone in breach of an agreement, our client then looks at us and says “We should do this for our employees too because we don't want to be at some type of competitive disadvantage.”

So, you can have a discussion with the client then about whether that makes sense. But sometimes, depending on what the industry is doing, regardless of the trend of litigations, or the trend of state laws, the market can dictate whether it makes sense for non-competes to still be used with employees.

Key Takeaways for Employers

JR: I agree with that. To sum it up, there is no uniform policy. I think that any company that's approaching this, especially one that does business in all 50 states and saying, “I have a uniform policy that everybody's signing these things.” I think that really could be a mistake. You should be much more strategic about why you're having your employees sign these restrictions and then really giving thought to and getting legal advice about what state law applies to that document and whether you can even do what it is you're trying to do.

Being thoughtful and strategic and not taking some sort of uniform approach. I understand this concept of the competitive nature and “if my competitors are doing this, I want to do it too,” But being mindful about it I think is really the best approach.

Once again, I'm Jen Rubin. Thank you, Brendan Lowd, and for those who tuned in to our Practical Policies podcast, this has been an interesting discussion about non-competes. Visit us at mintz.com for more content and commentary as we proceed with our Practical Policies podcast.

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