State-by-state approach needed to US non-compete reforms

Last week we looked at whether the review of restrictive covenants in the US may influence the UK government’s review of non-compete clauses. The two countries share the goal of wanting to boost the economy and so, to that end, remove or reduce the impact of anti-competitive practices such as restrictive covenants. We are returning to this to get further insight from US lawyer Ben Stockman – and we’ll come to that in a moment.

A reminder of the background to this. Eighteen months ago the UK government launched its consultation on measures to reform post-termination non-compete clauses in contracts of employment. We are still waiting for the response to that and, meanwhile, speculation continues as to what the changes will be and whether US policy will shape what happens here. President Biden has already signed an Executive Order on promoting competition in the US. The order, among other matters, encourages the Federal Trade Commission, the FTC, to consider developing rules to ‘curtail the unfair use of non-compete clauses’, along with ‘other clauses or agreements that may unfairly limit worker mobility’. 

Last week Ben Stockman told this programme about the role of the FTC and its remit. He said he didn’t think a complete ban on non-competes was likely, rather the FTC would probably take a more nuanced approach which, he said, could focus on establishing a standard of enforceability for such agreements across the country, standardising how courts would examine non-competes in a similar manner right across the US. 

Similarly, in the UK we think a complete ban on non-compete clauses is unlikely. Instead, one of the options the government is considering is making employers pay compensation in return for being able to enforce a clause. So, is that something also being discussed in the US? It’s a question I put to Ben Stockman:

Ben Stockman: “So that is an approach that many employers take currently in the US and it increases the likelihood of enforceability of a non-compete. We call it paying an employee to sit on the side-lines. There is a sliding scale, of course. You can't pay $1 and expect to enforce a non-compete against a middle-manager or below. Typically, the way companies do this, and you see it most frequently with higher level executives, is an employer will continue to pay the equivalent of that employee's salary, post-employment, for that employee to sit on the side-lines and not compete. I don't expect the FTC to issue a regulation that would standardise that approach. I think that more likely would be that, if the FTC were to establish an enforceability standard, for example, uniformly across the US, that employers would still have to go through the analysis, within that standard, as to whether a ‘pay-to-sit-on-the-side-lines’ approach would be enforceable. I still expect it to be a matter of degree.”

Joe Glavina: “So what should employers be doing now, if anything? Is it a case of waiting to see what happens? 

Ben Stockman: “So large employers in the United States are already well familiar with the requirement to pivot as new laws come out on a state-by-state basis. So for example, employers operating in California, which most large employers are because it's a huge economic hub here in the United States, already understand that you cannot have a blanket approach to non-competes in California, they're illegal per se. So what employers focus on in a state like California is creating robust confidentiality agreements with their key employees to ensure that their confidential information is protected and then using the trade secret laws, the existing trade secret laws, to protect against theft of company secrets. That's one approach that employers are taking, and have been taking now for many years, because of California's ban. I will say this, the main takeaway for employers operating in the United States is that it's still a creature of state law, you're still going to need to understand, evaluate and adapt to the laws in the states in which you're operating and I would expect, almost regardless of what the FTC issues as far as rules go, unless there's some major sea change, that it will continue, to a certain extent, to be a state-by-state process for employers operating United States.”

Last week Ben talked to this programme in some detail about the scope of the potential reforms to restrictive covenants in the US, and the FT’s part in that. That’s ‘Could US review of non-competes sway UK reforms?’ and is available now for viewing from the Out-Law website.