States Re-Examining Noncompete Agreements

States have recently been taking a closer look at noncompete agreements and their impacts on the workforce. This year, the Idaho Legislature strengthened its noncompete laws while the South Dakota Supreme Court issued an opinion only partially enforcing a noncompete. According to Peter Steinmeyer, a member of the law firm Epstein Becker Green, these actions are part of the national trend of hostility regarding noncompete agreements.

The U.S. Treasury Office of Economic Policy in its report, Non-compete Contracts: Economic Effects and Policy Implications, defines noncompete agreements as “contracts between workers and firms that delay employees’ ability to work for competing firms.”

Noncompete agreements are used to protect customer relationships and intellectual property, reduce labor turnover, and increase employer leverage in future negotiations with employees.

Many states have statutes that authorize noncompete agreements if there is a legitimate business interest to be protected. In other states, noncompete agreements are authorized by case law provided they are “reasonable.” In general, there are three elements that must be satisfied for a finding of reasonableness: the employer has a protectable interest that justifies the agreement; the agreement is reasonable as to the length of time it encompasses; and the agreement is reasonable as to the geographical area it covers. California, North Dakota, and Oklahoma are exceptions to the rule. In these states, noncompete agreements are not enforced.

The report also discusses the advantages and disadvantages of noncompete agreements. Benefits include the promotion of innovation through the protection of trade secrets and a reduction in employment turnover. Costs include reduced bargaining power for the worker which may lead to lower wages and the possibility of employees leaving their occupations entirely so as to not violate the agreements.

Other, more overarching problems may exist as well. Noncompete agreements may be used in nontransparent ways—employees may not understand the implications of a noncompete agreement and employers may ask the employee to sign the agreement only after accepting an employment offer. Also of importance is that approximately 15 percent of workers without a four-year college degree and approximately 14 percent of workers earning less than $40,000 each year are bound by noncompete agreements.

In March, the Idaho Legislature repealed a noncompete agreement statutory amendment it passed in 2016.

According to Boise State Public Radio, “The 2016 law had made it easier for Idaho employers to sue former [key] employees over noncompete agreements, sparking concerns from business groups across the state that it created an imbalance between employers and employees.”

With its passage, Senate Bill 1287 essentially requires employers to show the likelihood of irreparable harm caused by a violation of a noncompete agreement before a court will issue an injunction. Idaho Gov. Butch Otter allowed the bill to become law without his signature but included a letter expressing reservations and noting the lack of consensus within the business community.

States such as Massachusetts, New Jersey, Pennsylvania, and Vermont have also considered legislation restricting or banning the use of noncompete agreements in recent years.

Also in March, the South Dakota Supreme Court issued an opinion that only partially enforced a noncompete agreement. South Dakota allows for noncompete agreements generally but with statutory restrictions.

In Farm Bureau Life Ins. Co. v. Dolly, the South Dakota Supreme Court found that Farm Bureau could prevent their former salesman from soliciting its customers, but the company could not prevent the former employee from selling insurance to its customers who contacted him. Taking the relevant statute at face value, the court stated that the general rule prohibiting noncompete agreements “is a legislative expression of public policy” and exceptions to the general rule must be narrowly construed.

Noncompete agreements are increasingly a hot-topic among state legislatures and courts. State leaders will be watching new developments in case law in their states as well as others for potential advantages and disadvantages to strengthening or weakening restrictions on such agreements as they may affect their states’ workforce.